The Cost of Corporate Bond Financing in Latin America

Abstract

Applying an extended version of the structural approach to pricing risky corporate debt, we look into the evolution and determinants of the cost of bond financing for Latin American firms. We use a dataset including 667 quarterly panel observations of Argentinean, Brazilian, Chilean and Mexican firms, with market and balance-sheet information in order to account for the cross-sectional and time series variations in the yield spreads of 72 US dollar-denominated corporate bonds issued by 22 different publicly traded (listed) firms. Resorting to panel econometric techniques, we test the economic and statistical significance of the determinants of corporate bond spreads, namely sovereign default risk, liquidity, leverage, firm-value volatility and risk-free interest rate volatility and the interaction between the latter two and leverage. In addition, when sovereign spreads come out as a statistically and economically significant determinant of corporate spreads, we test whether market participants apply the sovereign ceiling rule to the prices and yield spreads of those firms’ bonds, as rating agencies do under a number of circumstances and conditions.