Corporate Credit Spreads and the Sovereign Ceiling in Latin America

GRANDES, MARTÍN; DEMIAN PANIGO

Emerging Markets Finance and Trade

Taylor Francis

Año: 2016

1540-496X

We exploited a panel of 72 U.S. dollar-denominated bonds issued by Latin American publicly listed firms between 1996 and 2004, a period of regional financial crises, to answer the following three questions: (1) Is sovereign risk a statistically and economically significant determinant of the corporate credit spread, controlling for firm- and bond-specific characteristics? (2) If yes, do market participants apply the sovereign ceiling rule adopted by rating agencies in the pricing of our bond market data? (3) How do market views compare with the rating agencies ceiling policy for each corporate bond? We found strong evidence of an economically and statistically significant effect of sovereign risk on corporate spreads across different panel econometric specifications and bonds. Moreover, markets do not apply the ceiling rule in 77% to 90% of the bonds we sampled, and these findings are consistent with rating agencies? policies towards the latter for approximately 50% of the firms. These results are robust to the inclusion of firm- and bond-specific variables derived from the structural approach to credit risk and to the business cycle in each country.