Loan Terms and Collateral: Evidence from the Bilateral Repo Market

We study secured lending contracts using a proprietary, loan-by-loan database of bilateral repurchase agreements containing groups of simultaneous loans backed by multiple tranches within a securitization. We show that lower-quality loans (defined as loans backed by lower-rated collateral) have higher margins and spreads. We calibrate a model using collateral asset prices and find that lower-quality loans are riskier despite the higher margins, yet cheaper for the borrower. This finding is consistent with a combination of lender optimism and reaching for yield. We also show that lower-quality loans have longer maturity, consistent with models of rollover concerns with asymmetric information