Pricing of International 144A Debt: Evidence from the U.S. Secondary Bond Market

We provide a first comprehensive study of the secondary market pricing of 144A debt issues in the US market. The 144A debt refers to the private placement issues made typically by low-rated and high-risk foreign and domestic US firms that seek quick capital funding, without the onerous disclosure requirements mandated for public debt issues. For e.g. data sourced from FISD shows that foreign private debt issuances totaled over $2 trillion (from over 1600 issuers) compared to $3.5 trillion of foreign public debt (emanating from over 1900 issuers) in US overall from 76 countries during 1994-2010.
 
Using an exhaustive sample of bond issues and secondary market trades during 1994-2010 period, we consider foreign 144A debt issuers from emerging and developed markets (constituting our treatment sample) and benchmark their performance to three different control samples: (a) Yankee debt issuers, (b) US 144A issuers, and (c) US public debt issuers. We explore the validity of competing hypotheses related to illiquidity, default, governance, familiarity and private information risks in explaining the 144A bond spreads across issuers, countries and over time.Further 144A transaction spreads in the US secondary market are significantly higher for foreign and emerging market 144A issuers compared to control samples. Illiquidity, default, governance and familiarity risks together can explain the emerging market premium in bond spreads. The financial crisis has significant effects on 144A bond pricing and incrementally so by influencing the effect of order imbalance and and primary dealer inventories on bond spreads.