Private or Public Debt? Effect of Crisis on Financial Intermediation

How did the crisis impact financial intermediation? We address this question by studying a unique market segment, viz. foreign private debt issued in the U.S, which grew in size despite the financial crisis. Specifically foreign private (or Rule 144A) debt issued in U.S. registered over a five-fold increase compared to public (or Yankee) debt between pre-crisis and crisis periods, while at the same time domestic private (144A) debt issuances by U.S. firms remained relatively flat. Using an exhaustive sample of foreign bond issuances in U.S. from over 65 countries between 1990 and 2013, we examine the effects of crisis on three key corporate decisions viz., debt choice, pricing and market timing between public (Yankee) and private (Rule 144A) debt issues for all foreign firms. We find that Qualified Institutional Buyers (QIBs) the only investors in unregistered 144A bondswere preferentially funding foreign firms in the 144A market and at better spreads, in spite of the firms’ high idiosyncratic risks and leverage, and excessive underlying local market volatility. We however see no such preference in 144A lending to domestic U.S. borrowers. Our findings are overall consistent with the flight of intermediation that as many good quality foreign firms began issuing in U.S. due to local capital constraints, QIBs were able to better allocate their scare capital in favor of quality private debt borrowers.