About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

80 Fed. Res. Bull. 5 (1994)
The Economics of the Private Placement Market

handle is hein.journals/fedred80 and id is 11 raw text is: Staff Studies The staff members of the Board of Governors of the Federal Reserve System and of the Federal Reserve Banks undertake studies that cover a wide range of economic and financial subjects. From time to time the studies that are of general interest are pub- lished in the Staff Studies series and summarized in the Federal Reserve Bulletin. The analyses and conclusions set forth are those of the authors and do not necessarily indicate concurrence by the Board of Governors, by the Federal Reserve Banks, or by members of their staffs. Single copies of the full text of each study are available without charge. The titles available are shown under Staff Studies in the list of Federal Reserve Board publications at the back of each Bulletin. STUDY SUMMARY THE ECONOMICS OF THE PRIVATE PLACEMENT MARKET Mark Carey, Stephen Prowse, John Rea, and Gregory Udell Prepared as a staff study in spring 1993 The private placement market is an important source of long-term funds for U.S. corporations. Nonetheless, it has received relatively little atten- tion in the financial press or the academic litera- ture, partly because of the nature of the instrument itself. In particular, a private placement is a debt or equity security sold in the United States that is exempt from registration with the Securities and Exchange Commission by virtue of being issued in transactions not involving any public offering. Thus, information about private transactions is often limited, and following and analyzing devel- opments in the market are difficult. Indeed, the last major study of the private placement market was published in 1972, and only a few articles have appeared in economics and finance journals since then. This study examines the economic foundations of the market for privately placed debt, analyzes the market's role in corporate finance, and deter- mines its relationship to other corporate debt mar- kets. One key characteristic of the private place- ment market is that it is information intensive, meaning that lenders must on their own obtain information about borrowers through due diligence and loan monitoring. Many borrowers in this mar- ket are smaller, less-well-known companies or those with complex financings, and thus they can be served only by lenders willing to perform exten- sive credit analyses. Such borrowers effectively have no access to the public bond market, which provides funding primarily to large, well-known firms posing credit risks that can be evaluated and monitored with publicly available information. In this respect, private market lenders, which are mainly life insurance companies, resemble banks more than they resemble buyers of publicly issued corporate debt. However, the private placement market is not exactly like the bank loan market: Private placements are mainly longer-tena, fixed- rate debt, and borrowers in this market are on average larger and less information problematic than bank borrowers. Private placements typically have fewer and weaker covenants and are less frequently secured than bank loans. The study compares the terms of private place- ments with those of public bonds and bank loans and analyzes the characteristics of borrowers, their

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most