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The Empirical Determinants of Local-Currency-Denominated Corporate Spreads in Emerging Economies: Evidence from South Africa

by Martin Grandes of the the American University of Paris, and
Marcel Peter of Swiss National Bank

July 2007

Abstract: This paper analyzes and quantifies the importance of sovereign risk in determining corporate yield spreads in emerging economies. It also investigates the extent to which the practice by rating agencies and banks of not rating companies higher than their sovereign ("country or sovereign ceiling") is reflected in the spreads of South African local-currency-denominated corporate bonds. The main findings are: (i) sovereign risk appears to be the single most important determinant of corporate spreads in South Africa; (ii) the sovereign ceiling does not apply in the spreads of the industrial multinational companies in the sample; and (iii) consistent with rating agency practice, the sovereign ceiling appears to apply in the spreads of most financial companies in the sample

JEL Classification: F34, G12, G15.

Keywords: sovereign risk, corporate default risk, spread, sovereign ceiling.

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