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How Expensive Are Secured Bank Loans? (Job Market Paper)

Abstract: Do differences in average recovery rates explain the differences in credit spreads between bank loans and bonds? I first find that the heterogeneity in capital structure confounds the comparison -- controlling for priority positions (seniority), actual recovery rates are not significantly different between loans and bonds, suggesting bank lenders are not special in recovering values due to monitoring. Second, using ex-ante measures of expected recoveries based on secondary market prices and estimates of loss given default (LGD) by rating agencies, the premium in loan spreads compared to bond-equivalent spreads is reduced by about one-third. Third, I show that dominant banks in the loan origination market capture lower premiums than other banks when selling loans in the secondary market, ruling out a bank market power explanation. Overall, my findings shed light on the credit risks of secured loans as loans and bonds have become more similar over time.

Institutional Synergies and the Fragility of Loan Funds (SSRN) with Mustafa Emin, Christopher James, and Tao Li

2023, Revise & Resubmit, Review of Financial Studies

Presentations (* by coauthor): NBER Summer Institute 2022*, FIFI 2022, CICF 2022, FMA 2022, FMCG 2022, University of Utah 2022*, Financial Stability Board Conference 2022*, FIRS 2023*, OCC Symposium on Emerging Risks in the Banking System 2023*, UTD Finance Conference 2023, AFA 2024 

Abstract: There are two major institutional investors in the syndicated loan market: collateralized loan obligations (CLOs) and bank loan mutual funds. CLOs are closed-end funds while bank loan mutual funds are open-end funds that issue claims that are redeemable on demand. In this paper, we examine whether CLOs provide arbitrage capital that contributes to the resilience of loan funds. We find that CLOs provide liquidity through par building trades when loan funds experience large outflows. CLO-provided liquidity limits redemption-induced fire-sale discounts but only for loans that are par build eligible.

Social Networks and Investor Beliefs: Evidence from the Municipal Bond Market (SSRN) with Tao Li

Presentations (* by coauthor): Virtual Municipal Finance Workshop 2021*, AFA 2022 Poster, Midwest Finance Association 2022*

Abstract: We study the functioning of the primary market for municipal bonds during the COVID-19 pandemic. The average offering yield increases while the number of new issues drops when county-level COVID-19 case and death counts rise, with investors exhibiting great concern over coronavirus-related mortality. Exploiting the differential timing of the implementation of local mitigating policies, we find that emergency declarations exert an adverse effect, leading to a 69 basis-point increase in offering yields and a significant drop in new issuance. Investors shun transportation and dedicated tax bonds or bonds issued in fiscally unhealthy states. Announcements of first cases and stay-at-home orders, however, have weak impacts. The Federal Reserve's unprecedented interventions through two municipal liquidity facilities have calmed the market. Offering yields on average dropped 200 basis points on March 23, 2020 alone. New issue volume also rises gradually over the study period. Municipal bond yields, however, have remained elevated well above normal levels, potentially reflecting ongoing fiscal challenges that municipal governments face.