Credit Derivatives and Loan Pricing

L. Norden; W.B. Wagner

Credit Derivatives and Loan Pricing

L. Norden, W.B. Wagner

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Abstract

This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.

Original language	English
Place of Publication	Tilburg
Publisher	TILEC
Number of pages	37
Volume	2007-015
Publication status	Published - 2007

Publication series

Name	TILEC Discussion Paper
Volume	2007-015

Keywords

Syndicated Lending
Loan Rates
Credit Derivatives
Credit Markets
Credit Spreads

Access to Document

2007-015

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title = "Credit Derivatives and Loan Pricing",

abstract = "This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks{\textquoteright} loan pricing behavior and thus have an impact on actual financing decisions in the economy.",

keywords = "Syndicated Lending, Loan Rates, Credit Derivatives, Credit Markets, Credit Spreads",

author = "L. Norden and W.B. Wagner",

note = "Pagination: 37",

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volume = "2007-015",

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TY - UNPB

T1 - Credit Derivatives and Loan Pricing

AU - Norden, L.

AU - Wagner, W.B.

N1 - Pagination: 37

PY - 2007

Y1 - 2007

N2 - This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.

AB - This paper examines the relationship between the new markets for credit default swaps (CDS) and the pricing of syndicated loans to U.S. corporates. We find that changes in CDS spreads have a significantly positive coefficient and explain about 25% of subsequent monthly changes in aggregate loan spreads during 2000-2005. Moreover, when compared to traditional loan pricing factors, they turn out to be the dominant determinant of loan spreads. In particular, they explain loan rates much better than same rated bonds. This suggests that, even though CDS and bond markets may equally price market credit risk, a substantial part of CDS prices additionally contains loan-specific information. We also find that, over time, new information from CDS markets is incorporated into loans faster, but information from other markets is not. We argue that this indicates that the markets for CDS influence banks’ loan pricing behavior and thus have an impact on actual financing decisions in the economy.

KW - Syndicated Lending

KW - Loan Rates

KW - Credit Derivatives

KW - Credit Markets

KW - Credit Spreads

M3 - Discussion paper

VL - 2007-015

T3 - TILEC Discussion Paper

BT - Credit Derivatives and Loan Pricing

PB - TILEC

CY - Tilburg

ER -