What’s different about loans? An analysis of the risk structure of credit spreads

Understanding the determinants of credit spreads has always been an important objective of academic researchers, regulators and practitioners alike. While extensive research has been produced on bonds and loans separately, few empirical studies have analyzed those two classes of debt instruments jointly. The aim of this paper is twofold: first, we derive a simple structural model in which differences between bond and loan spreads are investigated, based on the different monitoring ability of bankers and bond-holders; second, we empirically analyse the determinants of bond and loan spreads and test the prescriptions of the model. The theoretical model is based on the introduction of a stochastic default barrier that accounts for informational noise met by lenders, while the empirical analysis is based on a sample of 7,926 Eurobonds and 5,469 syndicated loans originated between 1991 and 2003. The empirical results confirm the key finding of the model, that is, that while spreads increase as ratings worsen for both bonds and loans, the spread/rating link is quite steeper for the former. JEL Classification Numbers: G15, G21, G28 EFM Classification Codes: 510, 550, 570