The economics of private placements : middle-market corporate finance, life insurance companies, and a credit crunch

Abstract

In this article, Stephen Prowse examines the private placement market. Like the bank loan market, this market is information-intensive: parties negotiate lending terms, lenders evaluate and monitor borrowers' credit risk, covenants are used to control risk, and borrowers lack access to public debt markets. There are also differences from the bank loan market : debt instruments are securities, not loans; maturities are longer; interest rates are fixed, not floating; and the principal investors are life insurance companies not banks. The article provides evidence on the credit crunch that occurred in the below-investment-grade sector of this market in the early 1990s and that apparently continues to this day. Asset-quality problems in 1990 and 1991 focused regulatory, stock market, media, and policyholder attention on the financial solvency of insurers, who withdrew from this sector of the market. The article also examines reasons for the persistence of the crunch.Bank loans ; Interest rates ; Credit