Pricing and Usage: An Empirical Analysis of Lines of Credit

Abstract

The hypothesis that committed revolving credit lines with fixed spreads can provide firms with interest rate insurance is a standard feature of models on these credit facilities’ interest rate structure. Nevertheless, this hypothesis has never been tested. Its empirical examination is the main contribution of this paper. To perform this analysis, and given the unavailability of data, we hand-collect data on usage at the credit line level itself. The resulting dataset enables us also to take into account characteristics of credit lines that have been ignored by previous research. One of them is that credit lines can have simultaneously fixed and performance-based spreads. Our results for credit lines that give the option to borrow at fixed and variable spreads support the hypothesis that fixed spread credit lines are used as hedging instruments. However, this hypothesis is inconsistent with our results for credit lines that only allow borrowing at fixed spreads.