Commercial Bank Underwriting of Credit-Enhanced Bonds: Are there Certification Benefits to the Issuer?

Abstract

Recent studies have expanded the commercial bank certification hypothesis to include banks acting in an underwriting capacity. This paper further develops that research by focusing on the industrial revenue bond market in which banks have the unique opportunity to simultaneously act as both credit guarantor and underwriter. When explicitly allowing for bank-issued standby letters of credit (guarantees), we find significantly greater yield spreads for those bonds underwritten by commercial banks compared to bonds underwritten by investment banks. Overall, no net benefit appears to accrue to the bond issuer when attempting to achieve joint (or double) certification benefits by employing commercial banks as both credit guarantor and underwriters except in the special case where the same bank acts as both guarantor and underwriter. This limited certification effect is further validated when the credit quality of participating banks is accounted for. This result is consistent with an "economy of scope" in monitoring and reusing information.