Market conditions, default risk and credit spreads

This study empirically examine the impact of market conditions on credit spreads as motivated by recently developed structural credit risk models. Using credit default swap (CDS) spreads, we find that, in the time series, average credit spreads are decreasing in GDP growth rate, but increasing in GDP growth volatility. We document that credit spreads are lower when investor sentiment is high and when the systematic jump risk is low. In the cross section, we confirm that firm-level cash flow volatility raises credit spreads. More importantly, we demonstrate that the impact of market conditions on credit spreads is substantially affected by firm heterogeneity. During economic expansions, ceteris paribus, firms with high cash flow betas have lower credit spreads than those with low cash flow betas. This relation disappears during economic recessions, consistent with theoretical predictions. -- In diesem Arbeitspapier untersuchen wir empirisch, wie die gesamtwirtschaftlichen Bedingungen die Renditeabstände von Unternehmensanleihen, die mit einem Ausfallrisiko behaftet sind, beeinflussen. Dabei verwenden wir Spreads von Kreditausfallswaps (Credit Default Swap, CDS) als Näherungswert für Kreditspreads und stellen fest, dass die durchschnittlichen Kreditspreads im Zeitverlauf bei wirtschaftlicher Expansion niedriger und bei wirtschaftlicher Rezession höher sind. Wenn das Wirtschaftswachstum volatiler ist, führt dies ebenfalls zu höheren Kreditspreads. Wir stellen fest, dass Kreditspreads bei positiver Anlegerstimmung und geringem Risiko eines marktweiten Sprungs niedriger ausfallen. Firmenübergreifend stellen wir fest, dass ein auf Unternehmensebene volatiler Cashflow zu einer Erhöhung der Kreditspreads führt. Was noch entscheidender ist, wir zeigen, dass in Zeiten wirtschaftlicher Expansion ? bei ansonsten gleichen Bedingungen ? Unternehmen, deren Cashflow stark mit dem gesamtwirtschaftlichen Wachstum korreliert, geringere Kreditspreads aufweisen als solche mit einer schwachen Cashflow-Korrelation. Im Einklang mit den theoretischen Voraussagen verschwindet dieser Zusammenhang in Zeiten wirtschaftlicher Rezession.Credit Risk,Credit Default Swaps,Credit Spreads,Market Conditions

“Does the tail wag the dog? The effect of credit default swaps on credit risk”

Credit default swaps (CDS) are derivative contracts that are widely used as tools for credit risk management. However, in recent years, concerns have been raised about whether CDS trading itself affects the credit risk of the reference entities. We use a unique, comprehensive sample covering CDS trading of 901 North American corporate issuers, between June 1997 and April 2009, to address this question. We find that the probability of both a credit rating downgrade and bankruptcy increase, with large economic magnitudes, after the inception of CDS trading. This finding is robust to controlling for the endogeneity of CDS trading. Beyond the CDS introduction effect, we show that firms with relatively larger amounts of CDS contracts outstanding, and those with relatively more “no restructuring” contracts than other types of CDS contracts covering restructuring, are more adversely affected by CDS trading. Moreover, the number of creditors increases after CDS trading begins, exacerbating creditor coordination failure for the resolution of financial distress

Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

Concerns have been raised, especially since the global financial crisis, about whether trading in credit default swaps (CDS) increases the credit risk of the reference entities. This study examines this issue by quantifying the impact of CDS trading on the credit risk of firms. We use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers between June 1997 and April 2009 to address this question. We present evidence that the probability of a credit downgrade and of bankruptcy both increase after the inception of CDS trading. The effect is robust to controlling for the endogeneity of CDS introduction, i.e., the possibility that firms selected for CDS trading are more likely to suffer a subsequent deterioration in creditworthiness. We show that the CDS-protected lenders’ reluctance to restructure is the most likely cause of the increase in credit risk. We present evidence that firms with relatively large amounts of CDS contracts outstanding, and those with “No Restructuring” contracts, are more likely to be adversely affected by CDS trading. We also document that CDS trading increases the level of participation of bank lenders to the firm. Our findings are broadly consistent with the predictions of the “empty creditor” model of Bolton and Oehmke (2011)

Can central banks boost corporate investment? Evidence from ECB liquidity injections

Liquidity injections by central banks have become frequent and massive, but their real effects on corporate investment remain unclear. We examine the longer-term refinancing operations (LTROs) of the European Central Bank (ECB) during the euro-zone sovereign crisis and show that greater LTRO funding to banks is associated with lower corporate investment. Riskier banks received funds through the LTROs and subsequently increased their holdings of risky sovereign debt. Corporate investment reductions are associated with these banks. Further, concurrent fiscal and regulatory policies impeded the effectiveness of the ECB liquidity injections. Our findings identify the contributing factors for these failures of monetary policy

A minimized rRNA-binding site for ribosomal protein S4 and its implications for 30S assembly

Primary ribosomal protein S4 is essential for 30S ribosome biogenesis in eubacteria, because it nucleates subunit assembly and helps coordinate assembly with the synthesis of its rRNA and protein components. S4 binds a five-helix junction (5WJ) that bridges the 5′ and 3′ ends of the 16S 5′ domain. To delineate which nucleotides contribute to S4 recognition, sequential deletions of the 16S 5′ domain were tested in competitive S4-binding assays based on electrophoretic mobility shifts. S4 binds the minimal 5WJ RNA containing just the five-helix junction as well or better than with affinity comparable to or better than the 5′ domain or native 16S rRNA. Internal deletions and point mutations demonstrated that helices 3, 4, 16 and residues at the helix junctions are necessary for S4 binding, while the conserved helix 18 pseudoknot is dispensable. Hydroxyl radical footprinting and chemical base modification showed that S4 makes the same interactions with minimal rRNA substrates as with the native 16S rRNA, but the minimal substrates are more pre-organized for binding S4. Together, these results suggest that favorable interactions with S4 offset the energetic penalty for folding the 16S rRNA

5′-end surveillance by Xrn2 acts as a shared mechanism for mammalian pre-rRNA maturation and decay

Ribosome biogenesis requires multiple nuclease activities to process pre-rRNA transcripts into mature rRNA species and eliminate defective products of transcription and processing. We find that in mammalian cells, the 5′ exonuclease Xrn2 plays a major role in both maturation of rRNA and degradation of a variety of discarded pre-rRNA species. Precursors of 5.8S and 28S rRNAs containing 5′ extensions accumulate in mouse cells after siRNA-mediated knockdown of Xrn2, indicating similarity in the 5′-end maturation mechanisms between mammals and yeast. Strikingly, degradation of many aberrant pre-rRNA species, attributed mainly to 3′ exonucleases in yeast studies, occurs 5′ to 3′ in mammalian cells and is mediated by Xrn2. Furthermore, depletion of Xrn2 reveals pre-rRNAs derived by cleavage events that deviate from the main processing pathway. We propose that probing of pre-rRNA maturation intermediates by exonucleases serves the dual function of generating mature rRNAs and suppressing suboptimal processing paths during ribosome assembly

Non-default Component of Sovereign Emerging Market Yield Spreads and its Determinants: Evidence from Credit Default Swap Market

This article shows that a sizable component of emerging market sovereign yield spreads is due to factors other than default risk, such as liquidity. The author estimates the non-default component of the yield spreads as the basis between the actual credit default swap (CDS) premium and the hypothetical CDS premium implied by emerging market bond yields. On average, the basis is large and positive for speculative-grade bonds and slightly negative for investment-grade bonds. The large positive basis for speculative-grade bonds supports the existence of speculation in the CDS market when the underlying's credit quality is bad. The author studies the effects of bond liquidity, liquidity in the CDS market, equity market performance, and macroeconomic variables on the non-default component of the emerging market yield spreads. The results show that bond liquidity has a significant and positive effect on the CDS–bond basis of investment-grade bonds. The results suggest that the liquid bonds of investment-grade bonds are more expensive relative to the prices implied their CDS premiums. However, the results are somewhat mixed and even contrary for the speculative-grade bond sample

UtpA and UtpB chaperone nascent pre-ribosomal RNA and U3 snoRNA to initiate eukaryotic ribosome assembly

Early eukaryotic ribosome biogenesis involves large multi-protein complexes, which co-transcriptionally associate with pre-ribosomal RNA to form the small subunit processome. The precise mechanisms by which two of the largest multi-protein complexes—UtpA and UtpB—interact with nascent pre-ribosomal RNA are poorly understood. Here, we combined biochemical and structural biology approaches with ensembles of RNA–protein cross-linking data to elucidate the essential functions of both complexes. We show that UtpA contains a large composite RNA-binding site and captures the 5′ end of pre-ribosomal RNA. UtpB forms an extended structure that binds early pre-ribosomal intermediates in close proximity to architectural sites such as an RNA duplex formed by the 5′ ETS and U3 snoRNA as well as the 3′ boundary of the 18S rRNA. Both complexes therefore act as vital RNA chaperones to initiate eukaryotic ribosome assembly