EXPLAINING LAUNCH SPREADS ON STRUCTURED BONDS

We investigate determinants of launch spreads in European securitizationtransactions over the last decade. First, we develop a simple, reduced-form pricingmodel for all issues across different transaction types and test it. We document thecritical importance of credit ratings without refinements as the key pricing factorsfor structured finance securities at launch. Next, we show that other pricedeterminants, such as placement characteristics, are consistently significant in theirimpact on spreads and delineate the opposing effects of liquidity and marketsegmentation. Finally, we show that other factors that might directly affectinvestors’ payoffs, such as creditors’ rights, exhibit consistent relationships tolaunch spreads beyond the credit rating. Hence, we conjecture that credit ratingagencies systematically differ from investors in their assessment of certain issues’and markets’ characteristics....