Non-bank Private Debt Research Articles

Information and Liquidity of Over-The-Counter Securities: Evidence from Public Registration of Private Debt

The Rule 144A or non-bank private debt represents a significant and growing segment of the total U.S. bond market. A large fraction of 144A debt issues carry registration rights and are subsequently publicly registered. We examine the liquidity effects induced by enhanced information transparency of the registration. We document three key results. (a) Following public registration of 144A debt, dealer-specific bid-ask spreads improve, and more so for firms with higher ex-ante information asymmetry; (b) trading activities are subdued following public registration, based on both trading volume and frequency of trading, regardless of more retail investors entering the market; and (c) bond dealers tend to reduce their net positions following public registration of 144A bonds. Our results imply that public registration broadens market access for more investors and simultaneously enlarges the information set to all market participants thereby lowering transaction costs. More transparency may however discourage participation from institutional investors as they lose the privilege of uniquely accessing the market, generating private information or extracting rents from such privilege. This may in turn lead to dealers exiting their positions and thereby supplying liquidity to rest of the market.

Governance-Default Risk Relationship and the Demand for Intermediated and Non-Intermediated Debt

This paper explores the impact of corporate governance on the demand for intermediated debt (asset finance, bank debt, non-bank private debt) and non-intermediated debt (public debt) in the Australian debt market. Relative to other countries the Australian debt market is characterised by higher proportions of intermediated or private debt with a lower inherent level of information asymmetry in that private lenders have greater access to financial information (Gray, Koh & Tong 2009). Our firm level, cross-sectional evidence suggests that higher corporate governance impacts demand for debt via the mitigation of default risk. However, this relationship is not uniform across all debt types. Intermediated debt such as bank and asset finance debt are more responsive to changes in governance-default risk relationship than non-bank and non-intermediated debt. The implication is that a firm’s demand for different debt types will reflect its governance-default risk profile.

The Choice Between Public and Private Debt: A Survey

The key insight from the seminal work by Modigliani and Miller (1958) is that market imperfections are necessary for financial decisions such as the debt vs. equity to impact firm value. When firms choose debt finance, they must also decide between public debt (e.g., corporate bonds) and private debt (either bank or non-bank). While there are excellent articles that summarize the research on the various aspects of the choice between equity and debt financing, to the best of our knowledge, this paper is the first to survey research on the firm’s choice between public and private debt and on the subsequent choice between bank and non-bank private debt. There is significant diversity in the sources and design of debt financing used by firms and evidence suggests that these decisions affect firm value. We present the major theoretical and empirical findings of the research on a firm’s decision to choose between public and private debt, as well as among the types of private debt. Our discussion of the extant research suggests that the choice between public and private debt is governed by four basic factors, which are not mutually exclusive. The first is the degree to which a firm needs certification; the greater the certification need the greater the preference for bank debt. Second, issuing public debt may result in the leakage of (valuable) proprietary information and, thus, firms with greater proprietary information will prefer bank debt. Third, when monitoring of managerial actions (such as investment choices) creates value, bank debt will be preferred over public debt. Finally, firms will exhibit a preference for bank debt when the flexibility to renegotiate debt contracts is valuable for example, when the firm is in financial distress.

The choice between public and private debt: A survey

We survey the major theoretical and empirical findings of the research on the firm’s choice between public and private debt, and on the subsequent decision between bank and non-bank private debt. First, we review information-based theories, where banks are information producers, keep the firm’s private information confidential, or monitor the firm’s actions after the loan. We then review models where banks’ advantage over public lenders is in their superior ability to liquidate the firm or renegotiate loan contract terms in the event of financial distress. Finally, we review the evidence on firms’ use of different types of private debt.

The corporate choice between public debt, bank loans, traditional private debt placements, and 144A debt issues

The main purpose of this study is to examine the determinants of the corporate choice between different forms of debt financing. By analyzing the most comprehensive sample of US corporate debt issues to date, I find that firms that issue 144A debt have significantly lower credit quality and higher information asymmetry than firms that issue traditional non-bank private debt. Further, the study shows that traditional private placements, rather than bank loans, are the favorite private debt source for firms with good credit quality. I also show that the firm characteristics of traditional private debt issuers have significantly changed after 1990 through to 2003. My results suggest the following pecking order of debt choices which is conditional on credit quality. In other words, high credit quality firms prefer public bond offerings and small firms, with good credit quality, are more likely to issue traditional private debt. A large group of firms characterized by moderate credit quality make extensive use of bank loans and poor credit quality firms preferentially issue 144A debt.

The Sources of Debt Matter Too

AbstractThis paper examines the effects of different types of private debt on firm cash balances, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more nonbank private debt have more cash, lower equity risk, and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that financial intermediaries' monitoring intensity increases with loan size. Depending on type, private debt mitigates information asymmetry or asset substitution, or both. Deposit relations associated with bank borrowing also contribute to banks' information advantage.

Determinants of corporate debt structure in a privately dominated debt market: a study of the Spanish capital market

To date, corporate debt structure research has focused largely on national debt markets characterized by both public and private debts supplies. However, given that most national debt markets are characterized by the absence of public debt supply, the representative debt market of Spain is used to extend the research on corporate debt structure. A double-hurdle test approach reveals that the likelihood of using bank debt is positively related to firm size and information availability but negatively related to firm credit worthiness, while the likelihood of using non-bank private debt is positively related to firm size, growth potential, relative firm size and degree of leverage. Further, it is found that the amount of bank debt firms hold is positively related to firm size, growth potential, information asymmetry, and age but negatively related to information availability. The amount of non-bank private debt is positively related to firm size but negatively to growth potential and age. Moreover, it is fou...

The Sources of Debt Matter, Too

This paper examines the effects of bank loans, loans from non-bank financial intermediaries, and unused bank credit lines on firm cash holdings, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more non-bank private debt have lower equity risk and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that depending on type, private debt mitigates the information asymmetry or asset substitution problem, or both. Results also imply that deposit relationships associated with commercial bank borrowing attribute to banks' information advantage.

Public Debt, Bank Debt and Non-bank Private Debt and Firm Characteristics Among Taiwanese Listed Companies

This study examines the relationship between the corporate debt ownership structure and various corporate financial characteristics in Taiwan. The results show that differences in terms of financial characteristics exist among firms that are financed by a bank debt, public debt, or non-bank private debt capital structure. Firms holding bank debt always borrow a large proportion of their total debt from the public market. This phenomenon is inconsistent with the argument that the reputation of firms with access to public debt is a substitute for bank monitoring. However, the use of bank debt implies certain benefits in terms of establishing a reputation that makes it easy for firms to access the public market. Furthermore, the use of bank debt cannot increase monitoring efficiency and result in higher leverage than in the case where bank debt is not used. Reputable firms will not hold higher levels of bank debt. Interestingly, firms predominantly using bank debt tend to be younger than firms that use other kinds of debt. Firms that predominantly use public debt have a significantly lower Tobin's q than firms with different debt patterns. This study finds that the determinants of debt ownership remain similar after the maturity effects of debt ownership are removed, implying that the firm debt ownership decision and debt maturity decision may be separable.

The choice among bank debt, non-bank private debt, and public debt: evidence from new corporate borrowings

Using a sample of 1,560 new debt financings, we examine the choice among bank debt, non-bank private debt, and public debt. The primary determinant of the debt source is the credit quality of the issuer. Firms with the highest credit quality borrow from public sources, firms with medium credit quality borrow from banks, and firms with the lowest credit quality borrow from non-bank private lenders. Non-bank private debt thus plays a unique role in accommodating the financing needs of firms with low credit quality. In addition, the choice of debt source is (weakly) influenced by managerial discretion.

The Choice Between Bank Debt, Non-Bank Private Debt and Public Debt: Evidence from New Corporate Borrowings

Using a sample of 1,560 new debt financings, we examine the choice among bank debt, non-bank private debt, and public debt. The primary determinant of the debt source is the credit qualit y of the issuer. Firms with the highest credit quality borrow from public sources, firms with medium credit quality borrow from banks, and firms with the lowest credit quality borrow from non-bank private lenders. Non-bank private debt thus plays a unique role in accommodating the financing needs of firms with low credit quality. In addition, the choice of debt source is (weakly) influenced by managerial discretion.