The behavior and determinants of credit terms: An empirical investigation of sovereign international bonds, 1980-1997

This research empirically investigates the evolution of the credit terms of sovereign international bonds from 1980 until 1997, and examines the determinants of the yield spread of sovereign international bonds.;The exploration of the primary market of sovereign Eurobond during this 18-period showed that the fixed rate structure is the most important structure of issuance and the U.S. dollar, the Deutsche mark, the Japanese yen and the European Currency Unit (ECU) are the main currencies of issuance. The offerings activity in this market is found to be influenced by the economic and interest rates situations in the industrialized countries representing key currencies of the sovereign Eurobond market. Offerings increase in volume during economic expansions and decline during recessions in the industrialized countries. Maturities of issuance fluctuated considerably during this period. During the first eight years the average maturity fluctuated between 6.8 and 10.9 years then tended to stabilize in a narrow range of 5.7 and 7.5 years during the last 10 years of the period covered in this research. The high fluctuation was mostly due to the booming of the Eurobond market in 1985 and 1986 after the end of the international debt crisis of 1982. Longer maturities reflected investors' confidence in the future.;Various variables such as term to maturity of the issue, the size of the issue, the callability of the issue, repeated experience of borrowing, and credit rating have been identified in the literature to influence yield spread on bonds. We use Ordinary Least Squares (OLS) regression to explore the effect of these variables on fixed-rate sovereign Eurobonds issues, denominated in various currencies and issued by different borrowers.;We further investigate the effect of these variables on the yield spread on subsets of A rated and B rated issues, and on subsets of issues in U.S. dollar and Deutsche mark.;Increased importance of the bond market relative to the loan market as a destination of sovereign borrowers makes studying the characteristics of this market very useful. This study contributes to an understanding of the factors influencing the yield spread of sovereign Eurobonds. The knowledge of these factors is important to understand the workings of this market, and it also helps sovereign borrowers to reduce yield spreads by adopting different strategies considering these factors. (Abstract shortened by UMI.)...