economic significance is largest for firms with a high share of CDS creditors.
Before turning to the discussion of the significance of these results relative to the liquidity in CDS markets, the next section studies whether creditors’ CDS holdings also affect firms’ debt financing more generally.
nancing risk, I first determine firms’ overall debt maturity, Debt Maturity, by calculating the principal weighted average debt maturity of the firm’s outstanding debt. If creditors’
CDS holdings positively affects firms’ refinancing risk then I first of all expect a positive correlation between creditors’ CDS holdings andDebt Maturity, as well as that the effect is independent of creditors’ net CDS positions. To test this hypothesis, I regress Debt Maturity on the specified firm-level measures of creditors’ CDS holdings, as well as a set of controls, including time, industry, firm and rating fixed effects following Saretto and Tookes (2013). The results are presented in Table 7.
Table 7
-In Models (1) to (4) I first provide an analysis conducted in the sample of both CDS and non-CDS firms. Although, I find a positive coefficient forCDS Firm in Model (1), the results outline no significant difference between CDS and non-CDS firms’ debt maturity for my sample. Instead, the results in Model (2) show that firms have significantly longer debt maturity in quarters where at least one of the firm’s creditors holds a CDS contract on the firm.26 The finding is in line with Saretto and Tookes (2013), but specifically suggests that the effect on firms’ debt maturity is linked to time-variations in creditors’
CDS holdings. In Models (3) and (4) I further explore potential difference due to creditors’
net CDS positions. While I do find a negative, respectively a positive, coefficient in the case of creditors that are net protection buyers, respectively sellers, the effects are not statistical significant compared to the debt maturity of non-CDS firms. Henceforth, relative to non-CDS firms, the results suggest that CDS firms’ refinancing risk is lower due to the presence of CDS creditors. In order to explore this positive impact on firms’
debt refinancing in more detail, Model (5) and (6) present the results where I investigate the effect of creditors’ net CDS positions sample of only CDS firms. As outlined in the table, I actually find significant differences in the debt maturity across CDS firms; firms with creditors that are net protection buyers have shorter debt maturities than firms with creditors that are net protection sellers. Relative to non-CDS firms, the debt maturity is only increased by 0.26 years for firms whose creditors’ are net buyers of CDSs while the debt maturity is increased by 1.59 years for firms whose creditors’ are net seller of CDSs.27
In order to help the understanding of the variation in the impact on CDS firms’ debt maturity it is of interest to study the source of the change in debt maturity. Theoretically
26Assuming that all variables are at the mean level, the results suggest that debt maturity is increased by 0.92, i.e., about one year, when their creditors’ hold a CDS contract on the firm.
27Compared to Saretto and Tookes (2013) who find that the debt maturity is increased by 1.09 to 1.79 years after the introduction of CDSs my findings show how the differences in creditors’ net CDS position helps explaining the variation in the effect on debt maturity.
may an increase in firms’ debt maturity arise not only due to the issuance of new, long(er)-term debt, but also due to the lack of refinancing of maturing debt. That is, the relative shorter debt maturity of firms whose creditors’ are net buyers of CDSs may simply be caused by the lower supply of credit that was documented in Section 4. In particular, this could arise if the firm’s creditors choose to refinance only a fraction of the firm’s maturing debt. However, the relative shorter debt maturity may also be caused by a shorter maturity of newly issued debt and, thus, imply a change in the type of debt.
Likewise, may the relative longer debt maturity of firms whose creditors’ are net sellers of CDSs be due to a significant lower amount of short-term debt, larger amount of long-term debt, and/ or replacement of short-term debt with more long-term debt. Accordingly, the change in these firms’ debt maturity could either arise due to foregone debt refinancing or a change in the type of debt. In order to outline the source for the change in debt maturity I next study changes in specific debt tranches that arise due to creditors’ CDS holdings. In particular, I analyze the amount of the firm’s debt that is due in one year (Debt Due: 0-1 Yr), two to five years (Debt Due: 2-5 Yrs), five to ten years (Debt Due:
5-10 Yrs), as well as ten to thirty years (Debt Due: 10-30 Yrs), all scaled by the total debt outstanding. I conduct the analysis in the sample of only CDS firms and present the results in Table 8.
Table 8
-Although I do not find a significant impact of the pure presence of creditors with CDS holdings the results outline significant effects when I account for whether the firm’s cred-itors are net protection buyers or sellers. As shown in Models (1), (3), (5), and (7), firms with creditors that are net protection buyers have a higher ratio of debt that is due within one to five years and a lower ratio of debt that is due within the next year.
This suggests, that debt maturity extension is caused by the refinancing of maturing debt with relative short-term debt. In addition, the results indicate a potential lower share of debt that matures within five to ten years which, in accordance to the previous finding of lower credit supply to firms with net protection buyers, may reflect that creditors lower their provision of medium-term debt (rather than short-term debt) in order to reduce their monitoring costs. In contrast, Models (2), (4), (6), and (8), show that when firms have creditors that are net protection sellers then the firm has a significant lower share of debt that is due within two to five years while fraction of debt due in five to ten years is higher. This not only suggests a decrease in more risky debt but also, since I do not
refinance their debt early, i.e., before maturing. As suggested by Xu (2017), the latter effect in particular helps firms to manage their refinancing risk.
In order to understand the significance of the debt maturity results compared to changes in the firm-level credit exposure, Appendix Table A4 presents the results of an analysis where I test the impact on debt maturityconditional on the firm’s debt capacity using the firm’s leverage ratios.28 Overall, I find that especially firms with low debt capacity will experience an effect in terms of debt refinancing. This is intuitive as firms with low debt capacity in general will be financially constrained and only have very limited options for additional credit supply. Hence, for these firms will a change in debt maturity still be an option to impose relaxation of financing constraints, without providing more credit.
5.2 The Effect on Other Costs of Debt
In terms of firms refinancing of debt, the previous analysis revealed that firms’ whose creditors make use of CDS contracts on average have more credit available, as well as longer debt maturity. Although, I find that CDS firms in overall may experience relaxed refinancing conditions there is a significant variation in firms’ debt refinancing options.
Accordingly, it is likely that there also is a association between creditors’ use of CDS and the more direct costs related to the firm’s debt financing. To the extent that the relaxed refinancing conditions come at a price and/or the presence of CDS contracts may affect the probability of debt refinancing (for instance due to the higher level of credit), then one would expect an increase in the firm’s debt financing costs. To address this issue, I provide an empirical investigation of direct costs associated with creditors’ CDS holdings by focusing on firms’ amount of interest payments as proxy for firms’ direct debt financing costs. Accordingly, I defineInterest To Credit as the firm’s interests and related payments, scaled by total credit outstanding.29 The model specification is similar to the ones used before and the results are presented in Table 9, Panel A.
Table 9
-In Model (1) to (3) I first conduct the analysis in the sample of both CDS and non-CDS firms. While only being statistical significant on the 1% level, the results in Model (1) on the one hand indicates that CDS firms compared to non-CDS firms have higher interest payments but on the other hand also outlines that the magnitude is lower in quarters
28Specifically, I separate firms into the sample ofLow Debt Capacity andHigh Debt Capacity where Low Debt Capacity (High Debt Capacity) refers to firms with average leverage ratios above (below) the median.
29In robustness tests I use the ratio of interest payments to total assets, as well as the natural logarithm of interest payments and find that the results and conclusions are robust to both alternative specifications.
where their creditors actually hold CDS contracts. While the findings suggest that CDS firms pay relatively more in interest, the net effect turns out to be negligible in terms of magnitude and statistical insignificant. In Models (2) and (3), respectively Models (4) and (5), I further investigate whether the effect depends on the creditors’ net CDS positions.
Although, the results suggest higher interest payments for firms with creditors that are net protection buyers relative to those firms that are net protection sellers, I do not find significant coefficients in these specification. Thus, the results suggest no significant higher direct costs caused by creditors’ CDS holdings and due to a higher reliance on debt financing by CDS firm. This is in line with Ashcraft and Santos (2009) who find that the availability of CDS contracts do not affect bonds spreads for the average borrower, as well as Caglio, Darst, and Parolin (2017) who show that CDS firms on average do not become more risky when the creditors hold CDS contracts.
While firms interest payment is a direct proxy of the costs of debt, firms may also face other costs associated with their debt financing. In particular, firms may become more financially constrained if the CDS holding of its creditors significantly limits the type of debt they can issue. A limitation on the type of debt reduces the firm’s flexibility in terms of debt refinancing and will, accordingly, be costly for the firm. As documented by Becker and Ivashina (2014), firms switch from loans to bonds at times characterized by tight lending standards. Thus, if I find an increase in firm’s bond to bank debt ratios due to creditors’ CDS holdings, respectively their CDS net positions, then this would reflect a contraction in the overall credit provision by the firm’s creditors. In Table 9, Panel B, I analyze this hypothesis by using the measure Bond To Debt, which is the firm’s amount of bonds outstanding, scaled by total debt. Models (1) to (3) again show the results where I conduct the analysis in the sample of both CDS and non-CDS firms.
The result in Model (1) indicates that CDS firms relative to non-CDS firms to a higher extent rely on bonds than on bank debt (e.g., similar to Shan, Tang, and Yan (2016)), but that there is no baseline effect of creditors’ CDS holdings. However, Models (2) and (3) outline a significant variation due to creditors’ net CDS positions. That is, when their creditors are net protection buyers (sellers) I find that firms to a higher (lower) extent rely on bonds than on bank debt. Thus, the firm’s refinancing conditions in terms of the type of debt indeed seem to be tightened when their creditors are net buyers. While this is intuitive, it also outlines, in the light of the previous findings that the credit,