Corporate Loan Spreads, Market Power, and the Default-Free Rate
The relation between corporate loan spreads and the default-free rate is investigated to determine whether lenders of corporate loans influence prices through increasing loan spreads as the default-free rate decreases, exploiting borrowers' rate relief. The Loan Pricing Corporation DealScan database is employed to create large samples of revolving and term loans, which are independently estimated using techniques that overcome simultaneous equation bias. We find evidence to support the contention that lenders of revolving loans influence loan spreads through increasing commitment fees as the default-free rate decreases. We do not find any evidence that lenders of term loans influence loan spreads