3 Issuing costs of state guaranteed bonds - Financial Risk and ...

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3 Issuing costs of state guaranteed bonds Table 4: Determinants of bond issuing cost used in the empirical analysis Group Policy variables Variable(s) Description Use of guarantee GUARANTEEi Use of guarantee indicator variable set at 1 if bond issue is covered by a state guarantee and 0 otherwise. Notional commitment NCOMMITk Notional value committed by guarantor in a given Member State.* Actual commitment ACOMMITk Actual value committed by guarantor in a given Member State.* Timeliness of payments in case of default Default and maturity risk TIMELYk Timeliness of payments in case of default in days by guarantor in a given member State.* The more timely payments are the lower is the impact of credit risk. Therefore, more timely payments should be associated with a lower issuing cost. Issuer rating RATINGj Issuer rating indicator variable set at 1 if issuing bank is rated AAA and 0 otherwise. A higher issuer rating (and therefore, lower default risk) should be associated with a lower issuing cost. Bond rating RATINGi Bond rating indicator variable set at 1 if bond issue is rated AAA and 0 otherwise. A higher bond rating (and lower default risk) should be associated with a lower issuing cost. Time to maturity at issue MATURITYi Time to maturity at issue in years of the bond issue. A bond issue with a longer time to maturity should be associated with higher maturity risk and therefore a higher issuing cost. Sovereign CDS SOVi Sovereign credit default swap rate, which captures compensation for expected loss due to a sovereign credit event. In the case of SG bonds particularly, a lower value should imply a lower issuing cost. Liquidity and interest rate risk Issuance volume LIQUIDi Amount issued in Euros. The larger the amount issued the more heavily traded it is likely to be and the less investors should be exposed to liquidity risk. A larger amount issued is therefore associated with a lower issuing cost. Interest rate type FIXEDi Interest rate type indicator variable set to 1 if the interest rate type if fixed and 0 if the interest rate type is floating. A bond issue with a fixed interest rate should be associated with a lower issuing cost due to the certainty of the value of payments it provides investors relative to a floating interest rate bond issue. Bond clauses Cross default clause CROSSi Cross default clause indicator variable set to 1 if the terms of a bond issue contain a cross default clause and 0 otherwise. A cross default clause puts the issuing bank in default if it defaults on another loan obligation. This provides more security to investors and is therefore associated with lower credit risk and a lower issuing cost. 40
3 Issuing costs of state guaranteed bonds Table 4: Determinants of bond issuing cost used in the empirical analysis Group Variable(s) Description Negative pledge clause NEGATIVEi Negative pledge clause indicator variable set to 1 if the terms of a bond issue contain a negative pledge clause and 0 otherwise. This indicates that the issuer will not pledge any of its assets if doing so provides the investor less security. It is therefore associated with lower credit risk and a lower issuing cost. Force majeure clause FORCEi Force majeure clause indicator variable set to 1 if the terms of a bond issue contain a force majeure clause and 0 otherwise. It removes liability on the part of the issuer in the case of unavoidable events and is therefore associated with higher credit risk and a higher issuing cost. Primary market efficiency Private placement Systematic characteristics PRIVATEi Private placement indicator variable set to 1 if a bond issue was privately placed and 0 otherwise. A private placement is a non-underwritten, unregistered bond sold directly to a single investor or a small group of investors. Currency USDi/EURi Currency denomination of the bond issue set to 1 if the bond is USD- or EUR-denominated in the case of the USDi/EURi variable, respectively and 0 otherwise. These variables capture currency-specific factors that may influence issuing cost. Month of issue Ti Month of issue indicators (one indicator for each month of the dataset bar one) with the relevant indicator set to 1 if the bond was issued in a given month and 0 otherwise. These indicators capture time-specific market conditions that may influence issuing cost. Volatility VOLi Volatility captured by the VSTOXX Index that measures market expectations of near-term up to long-term volatility based on the EURO STOXX 50 options prices. The greater the level of volatility the higher the issuing cost of bonds. Note: *These policy variables are interacted with the use of guarantee variable to determine whether they influence issuing cost
Page 2 and 3: Economic Papers are written by the
Page 4 and 5: Wherever possible London Economics
Page 6 and 7: Contents Page Annex 4 Results of di
Page 8 and 9: Tables, Figures & boxes Page Table
Page 10 and 11: Glossary vi Glossary BGN Bloomberg
Page 12 and 13: Executive summary Member States (Cy
Page 14 and 15: 1 Introduction 1 Introduction 1.1
Page 16 and 17: 1 Introduction 1.4 Research questi
Page 18 and 19: 1 Introduction analysis of the lat
Page 20 and 21: 2 Overview of state guarantee sche
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4 Impact of state guaranteed bonds
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5 Key empirical findings and polic
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References Acharya V.V. and Sundara
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Lando, D. (1997). 'Modeling Bonds a
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Annex 1 Eligibility criteria for st
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Annex 2 Comparison of SG and non-SG
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Annex 2 Comparison of SG and non-SG
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Annex 3 Analysis of missing issuin
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Annex 3 Analysis of missing issuing
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Annex 3 Analysis of missing issuing
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Annex 4 of diagnostic tests of issu
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Annex 4 of issuing cost model Figur
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Annex 5 -over model Annex 5 Results
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Annex 5 -over model Figure 25: Anal
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Annex 6 Availability of bank data A
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Annex 6 Availability of bank data T
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Annex 7 Linking Bloomberg and Banks
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Annex 8 Investigation of estimation
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