Pricing of International 144A Debt: Evidence from the U.S. Secondary Bond Market

Abstract

We study the information processing role of intermediaries, known as qualified institutional buyers (QIBs), using the secondary market trades of Rule 144A and Yankee debt issued by all foreign issuers in the U.S. Using an exhaustive sample of secondary U.S. bond market trades of over 260 international issuers from 40 countries during 1994-2010, we document three findings: (a) secondary yield spreads are significantly higher in foreign 144A versus Yankee market; (b) while credit, liquidity, governance, and familiarity risks are key yield drivers, each risk has a lower incremental impact on 144A spreads versus the Yankee control sample; and (c) during periods of high trading activity, QIBs provide liquidity and price support thereby moderating pressure on bond prices. Overall, our findings are consistent with the notion that specialized lenders, or QIBs, have the ability to better monitor and process information at lower costs in the private debt markets. This, in turn, leads to high-yield issuers opting for the Rule 144A market, causing credit segmentation across the Yankee versus 144A market for foreign debt.