Corporate Credit Spreads and the Sovereign Ceiling in Latin America

GRANDES, MARTÍN; PANIGO, DEMIAN TUPAC; PASQUINI, RICARDO

Emerging Markets Finance and Trade

M.E Sharpe, Inc,

Año: 2012

1540-496X

We exploit a panel of 72 US dollar-denominated bonds issued by Latin American publicly listed firms between 1996 and 2005 to answer the following three questions: 1) is sovereign risk an statistical 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?, and 3) how do market views compare with  the rating agencies ceiling policy for each corporate? We find 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 sample and these findings are consistent with rating agencies’ policies towards the latter for about 50% of the firms.