Speed of Issuance, Lender Specialization, and the Rise of the 144A Debt Market

Abstract

Financial Management, forthcomingUsing a large sample of convertible and straight debt issues in the public, 144A, and bank loan markets from 1991-2004, we find that the 144A market has risen largely at the expense of the non-shelf public market, the overwhelming majority of the 144A issues are subsequently registered, and straight debt issuers with the highest credit quality and transparency tend to use the shelf public market. Our findings suggest that firms' preference for speed of issuance drives the growth of the 144A market, and banks and qualified institutional buyers have advantages over public lenders in handling credit risk and information asymmetry.Rongbing Huang is an Assistant Professor in the

Why Larger Lenders Obtain Higher Returns: Evidence from Sovereign Syndicated Loans

“…We also interpret this result with some caution as most of the lenders in our data set are banks. Yet, it is consistent with Huang and Ramírez (2010) who demonstrate that banks gravitate toward segments of the credit market where monitoring, renegotiation, and liquidation are important.…”

“…Specifically, we show that the return premium is positively affected by the fraction of banks among the lenders in the higher ranks (that obtain the highest returns), while the return premium is not significantly affected by the fraction of banks in the entire syndicate or the fraction of banks in the lower ranks of the syndicate. Our evidence in support of the Banks Are Special Hypothesis is consistent with the recent study of the US credit market of Huang and Ramírez (2010), who conclude that banks gravitate toward segments of the credit market where monitoring, renegotiation, and liquidation are important. They show, for example, that in the so-called Rule-144A credit market, both banks and qualified institutional investors have advantages over public lenders at screening borrowers with high credit risk and information asymmetry.…”

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“…This seems to be particular important insofar as the existing literature touches on a problem of a marketplace of hybrid debt issuance rather incidentally. All research applied to private and public placement of convertible bonds were only a part of a broader examination on straight debt and equity issuances and there is lack of research regarding convertible debt itself (Huang and Ramirez, 2010;Gomes and Philips, 2012). Furthermore, all conclusions to be drawn on convertibles may be obsolete these days and there is an urgent need to bring previous findings up to date (most actual samples cover only 1991-2004 and 1995-2003).…”

“…If this article focuses only on profitable issuers of convertibles, the reasons for getting funds from private sources are obviously not driven by their poor financial performance, as it was the case in many papers, e.g., Fenn (2000), Denis and Mihov (2003), Huang and Ramirez (2010) and Arena (2010). Taking the hybrid nature of convertibles into account, we can then suppose that firms may issue bonds with an embedded conversion option for two reasons.…”

“…Yosha (1995) and Dhaliwal et al (2004) provide evidence that firms with high future growth opportunities are particularly interested in raising debt from private sources, perhaps in order to avoid costs of information disclosure if they decided to place bonds in the public market, and of revealing the information about valuable investment projects to their rival firms. Since it is crucial for most firms to start new investments without any delay, profitable companies may decide to issue private convertibles to reduce the time of due diligence process and thereby speeding up raising capital (Fenn, 2000;Huang and Ramirez, 2010). Putting all abovementioned predictions together, we can hypothesize that the issuers of private convertibles are relatively small, undervalued firms which raise hybrid capital as a cheaper substitute for common equity to finance their investment process.…”