Liquidity in the 144A Debt Market

This dissertation presents my research analyzing the liquidity component of corporate bond spreads for bonds issued privately under Rule 144A during the period 2003 – 2011. Rule 144A bonds are limited to trading among qualified institutional investors and therefore are inherently less liquid than registered corporate bonds. I assess an amendment to Rule 144 modifying the restrictions on public resale of Rule 144A bonds intended to increase the liquidity of 144A bonds and decrease the cost of capital to firms issuing these securities. This amendment provides an ideal exogenous shock to evaluate 144A bonds. Assessing the liquidity premiums and yield spreads on the bonds before and after the amendment, I provide evidence of the 2008 amendment’s impact on bond liquidity and cost of debt. Specifically, I find that the liquidity premium for Rule 144A bonds has increased since the amendment and the yield spreads have increased accordingly. This indicates the amendment did not have the desired regulatory impact of lowering the liquidity premium.

I also assess a unique aspect of the 144A bond market. Specifically, that certain 144A bonds are accompanied by registration rights agreements resulting in the 144A issue being exchanged for registered debt. I analyze the impact of the 2008 amendment on registration rights finding that the probability of a bond having a registration rights agreement has decreased since the 2008 amendment.

These new insights on 144A liquidity facilitate improved understanding of the yield premiums paid on 144A bonds and helps contribute to a distinct sector of the debt market by evaluating a market which is highly illiquid.