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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


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
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

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