Abstract
We examine the factors that influence nonfinancial firms’ choice of issuing standard corporate bonds vis-à-vis contracting structured finance, in the form of project finance or asset securitization arrangements. Using a data set of deals closed by 4,700 European borrowers between 2000 and 2016, we find that informational frictions and issuance costs affect public firms’ borrowing source choices. Findings suggest that borrowers choose structured finance when they are relatively smaller, less profitable, have lower asset tangibility, and seek long-term financing. Our findings also document that borrowers resorting to asset securitization tend to have larger growth opportunity sets. Borrowers resorting to project finance are less creditworthy than corporate bond issuers and, on average, asset securitization deals have an 87.6 basis points borrowing cost advantage over corporate bond deals for switchers.
Highlights
The main objective of our analysis is to study how Western European corporates choose between corporate financing (CF) and structured finance (SF), namely to investigate how firm’s characteristics, contractual features, and macroeconomic variables affect the choice between Asset securitization (AS) and corporate bonds (CB) deals and Project finance (PF) and CB deals
We find that firms, which employ both SF and CF within our sample period, are more likely to choose SF deals when issuing new debt
In PF, a collection of banks – bank syndicate – jointly extends several loans to a specific borrower (SPV) in order to spread risks. This argument explains why we find a positive relationship between the number of banks and the probability of observing a PF deal
Summary
Both in terms of number and aggregated market value of SF issuances in the last decades, prior research on corporate debt financing choice focused primarily on the choice between bank financing and bond financing [Diamond (1991b), Chemmanur and Fulghieri (1994), Houston and James (1996), Johnson (1997), Krishnaswami et al (1999), Cantillo and Wright (2000), Denis and Mihov (2003), Altunbas et al (2010)] Albeit that this stream of literature makes predictions about the relationship between debt source preferences and firm characteristics, it has devoted little attention to the choice between on-balance sheet and off-balance sheet financing. SF includes project finance and asset securitization deals while CF refers to corporate bond deals.
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