João Pinto

A Comparative Analysis Of Ex Ante Credit Spreads: Structured Finance Versus Straight Debt Finance

This paper examines the pricing of structured finance (SF) – asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDO) – and straight debt finance transactions. Using a cross-section of 24,525 European bonds issued by financial and nonfinancial firms in the 2000-2016 period, we show that although ratings are the most important pricing determinant for SF and corporate bonds (CB) at issuance, investors rely on other contractual, macroeconomic, and firms’ characteristics beyond these ratings. We find that CDO tranches have, on average, higher credit spreads than similarly rated CB, while investors are not compensated for facing higher systematic risk components in relation to investment-grade ABS and MBS. Our results also support the hypothesis of SF transactions as mechanisms of reducing funding costs: SF transactions’ weighted average spread is lower than that of comparable CB and originating firms’ creditworthiness does not deteriorate when compared to a sample of matched firms.

Debt Financing Choices: Theory and Evidence from Europe

We study the factors that, arguably, affect the probability of a new borrower choosing between structured finance (SF), either project finance (PF) loans or asset securitization (AS) bonds, and straight debt finance (SDF) – corporate bonds (CB) – transactions using a large cross section of 24,435 Western European loans and bonds issued between January 1st, 2000 and December 31st, 2011. Borrowers chose an SF transaction when they seek long-term financing and when they operate in a country with lower sovereign rating. Findings suggest that industrials, utilities, transportation, and governmental borrowers exhibit a higher likelihood of an SF transaction, more specifically, a PF transaction. Several macroeconomic factors, like market interest rate levels and volatility, and the slope of the Euro swap curve, positively influence the probability of observing an SF over an SDF transaction. The 2007-2008 financial crisis and the subsequent European sovereign debt crisis decrease the probability of observing an AS transaction. During the crisis, macroeconomic factors seem to significantly influence the probability of a sponsor to choose SF over SDF. We also find that credit spreads and loan to value ratios have a significant negative relationship for AS bonds. Overall, findings are in line with security design literature. SF transactions or instruments, based on extensively contractual and security design, allow the reduction of the net costs associated with asymmetric information and agency conflicts.This paper analyzes the factors that affect the probability of a new borrower choosing between structured debt financing (SF) and straight debt financing (SDF), using a sample of 12,075 Western European loan and bond issues closed during the 2000-2011 period. We find that borrowers choose SF when they seek long-term financing and a reduction in the funding costs. Our results document that floatation costs, information asymmetry, and renegotiation and liquidation risk affect the non-financial firms’ debt financing choice. We also find that financial institutions choose asset securitization when they want to raise relative larger amounts of debt and improve its economic performance. However, our analysis does not provide evidence supporting the hypotheses regarding the transfer of credit risk and regulatory capital arbitrage. In line with mainstream security design literature, our overall results show that SF transactions allow the reduction of the deadweight costs associated with asymmetric information problems, and principal-agent conflicts.

How banks price loans in leveraged buy-outs: an empirical analysis of spreads determinants

This paper investigates which factors determine the pricing of loans in LBOs, using a worldwide sample of 12,673 syndicated loans closed during the 2000-2013 period. We find that spreads and pricing processes differ significantly in market-based versus bank-based financial systems as well as in the U.S. vis-a-vis W.E. In the pre-crisis period borrowers in market-based financial systems face higher spreads (33.59 bps) than those in bank-based financial systems and loans closed in common law countries are associated with higher spreads (50.71 bps) than those closed in civil law countries. During the crisis period only loans in common law legal systems are associated with higher spreads. In line with Carey and Nini’s (2007) findings, we show that U.S. borrowers face higher spreads than W.E. borrowers. We also find that the pricing of loans in LBOs depends mainly on marketability and default factors and that acquired firms with a higher cash flow potential and asset tangibility face lower spreads. Finally, a robust convex relationship between spread and maturity is found for loans in LBOs.

The Choice between Project Financing and Corporate Financing: Evidence from the Corporate Syndicated Loan Market

This paper examines the pricing of project finance (PF) and non-project finance (non-PF) loans and examines the factors that influence the borrower’s choice between project financing and corporate financing. Using a sample of 210,273 syndicated loans closed between 2000 and 2014, we find that PF and Non-PF loans are influenced differently by common pricing characteristics and that PF loans in the U.S. and W.E. are priced in segmented markets. Borrowers choose PF when they seek long-term financing and funding cost reduction. We find that transaction cost considerations, the financial crisis and country risk affect the financing choice. Our results document that publicly traded sponsors who prefer project financing to corporate financing are larger, less profitable, more financially distressed and have a higher asset tangibility. Finally, privately held firms that choose off-balance sheet financing are smaller and less profitable and use PF to raise relatively larger amounts of debt.