The impact of global financial crisis on regulation S private debt market

Abstract

This study examines the impact of the 2007–08 global financial crisis on issuance activity and yield spreads in the Regulation S private debt market. We explore the implications of the flight-to-quality effect by comparing two types of Regulation S issues subject to different jurisdictions and territorial boundaries - standalone Regulation S issuance and combined Regulation S and Rule 144A issues. Our results suggest that flight-to-quality is the main effect during the crisis; this effect partially reversed after the crisis. We find that debt issuance declined by more than 70% during the crisis, and the yield spreads jumped by 50 basis points relative to the pre-crisis period. This effect is more pronounced for the combined Regulation S and Rule 144A issues that comprise mostly speculative-grade issues. After the crisis, the number of Regulation S debt issues more than doubled, but the average credit rating declined. We also find the yield spread difference between the standalone and combined issuance shrank after the crisis. Our evidence supports market segmentation between the two types of issuances due to substantial differences in geographical jurisdictions, investor base, and credit quality.