Boosted Credit Ratings in China: The Effects of Credit Enhancement on Bond Pricing
64 Pages Posted: 1 Apr 2020 Last revised: 21 Dec 2021
Date Written: December 21, 2021
More than 30% of credit bonds in China issued during 2009 and 2019 received improved issuance ratings, 97.1% of which used credit enhancement. We find that credit enhancement can lower credit spreads. The risk reduction and loss-sharing explanations serve as underlying mechanisms for the credit enhancement effects. The information-production and liquidity-improvement channels are excluded. Our findings remain robust after using the propensity score matching method, instrumental variable approach, and firm-year fixed effects. This paper highlights the functionality of credit enhancement vehicles as they provide a solution for low-rated firms to issue high-rated bonds and to lower the cost of debt financing.
Keywords: credit enhancement, financing costs, credit bonds, China
JEL Classification: G10, G12, G15, G19
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