Abstract

This paper examines the interaction between private debt and bank debt in corporate borrowing. Combining administrative bank loan-level data with non-bank private debt deals, we document that about half of U.S. private debt borrowers also rely on bank loans. These dual borrowers are typically larger, riskier firms with fewer tangible assets, lower interest coverage ratios, and higher leverage. When co-financing the same borrowers, private debt lenders typically extend larger but relatively junior term loans with longer maturities and higher spreads, while banks provide more senior loans, typically in the form of credit lines. Once a bank borrower accesses private debt, it often obtains additional bank credit but at significantly higher spreads. During times of market-wide distress, a borrower’s reliance on private debt is associated with increased drawdowns and higher default risk of bank credit lines. Our findings suggest that while private debt substitutes for relatively riskier bank term loans, it complements bank credit lines. However, this complementarity may also impose costly externalities on bank loans by exacerbating their drawdown risk.

Authors

Sharjil Haque, Board of Governors of the Federal Reserve System
Simon Mayer, Carnegie Mellon University
Irina Stefanescu, Board of Governors of the Federal Reserve System