What is different about loans? An analysis of the risk structure of credit spreads

While extensive research on the relationship between credit risk and spreads has been produced for bonds and loans separately, few studies have analysed them jointly. We derive a simple structural model where a stochastic default barrier accounts for informational noise, and differences between bond and loan spreads are explained through the different screening ability of bankers and bond-holders. We then test the model on a sample of 7,926 Eurobonds and 5,469 syndicated loans. Empirical results confirm the key finding of the model: while spreads increase as ratings worsen for both bonds and loans, the former show a steeper spread/rating relationship.