Leveraged loans: is high leverage risk priced in?

David P. Newton; Steven Ongena; Ru Xie; Binru Zhao

doi:10.1504/IJBAAF.2025.146550

Leveraged loans: is high leverage risk priced in?

David P. Newton, Steven Ongena, Ru Xie, Binru Zhao

Research output: Contribution to journal › Article › peer-review

Abstract

We investigate the impact of the 2014 Interagency Clarification on the leverage risk premium for bank- and non-bank-originated loans. Using a novel dataset from 2011 to 2019, we show that leveraged loan spreads have declined rapidly for non-bank facilities relative to bank facilities since the introduction of the 2014 Interagency Clarification. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when term loans are involved. We further demonstrate that a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, is strongly associated with a narrower leverage risk premium.

Original language	English
Pages (from-to)	120-138
Number of pages	19
Journal	International Journal of Banking, Accounting and Finance
Volume	15
Issue number	1-2
Early online date	2 Jun 2025
DOIs	https://doi.org/10.1504/IJBAAF.2025.146550
Publication status	Published - 2 Jun 2025

Acknowledgements

We especially thank Phil Molyneux for his inspiration, warm collegiality, and invaluable comments on this specific paper. His guidance and support were instrumental to our work. Rest in peace, Phil. We also thank Fotios Pasiouras (editor), Andrea Resti (editor), and an anonymous referee for their comments that greatly improved the paper. In addition, we thank Mark Jeffrey Flannery, Simone Giansante, Jarrad Harford, Christoph Herpfer, Winifred Huang, Clive Lennox, Xiang Li, William L. Megginson, Partha S. Mohanram, Felix Noth, Neslihan Ozkan, Alessio Reghezza, Elizaveta Sizova, Junyang Yin, and participants at EFMA 2021, IYFSC 2021, and IFABS Oxford 2021 and 2022 European Banking Authority (EBA) Policy Research Workshop for helpful comments. We thank Froloshka Kornelia for excellent data assistance in constructing our data sample. Errors and omissions remain the responsibility of the authors.

Keywords

information asymmetry
leverage risk
leveraged loan
syndicated loan pricing

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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abstract = "We investigate the impact of the 2014 Interagency Clarification on the leverage risk premium for bank- and non-bank-originated loans. Using a novel dataset from 2011 to 2019, we show that leveraged loan spreads have declined rapidly for non-bank facilities relative to bank facilities since the introduction of the 2014 Interagency Clarification. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when term loans are involved. We further demonstrate that a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, is strongly associated with a narrower leverage risk premium.",

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Leveraged loans: is high leverage risk priced in?

Abstract

Acknowledgements

Keywords

ASJC Scopus subject areas

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