Is drought risk priced in private debt contracts?. (13th January 2020)

• Record Type: Journal Article
• Authors: Do, Viet; Nguyen, Thu Ha; Truong, Cameron; Vu, Tram
• Is Part Of: International review of finance. Volume 21:Number 2(2021)
• Page Start: 724
• Page End: 737
• Publication Date: 2020-01-13
• Subjects: drought risk -- food industry -- lending experience -- loan spreads; Finance -- Periodicals; Financial institutions -- Periodicals; 332.673
• DOI: 10.1111/irfi.12294
• Languages: English
• ISSNs: 1369-412X

Abstract

Abstract: We investigate whether banks price drought risk in the interest rates charged to corporate borrowers. The results show that banks do charge drought‐affected borrowers higher loan spreads. The spread increase is most pronounced among food industry borrowers. Our findings are robust to alternative drought measures. We also document that lenders with more experience in lending to drought‐affected food borrowers charge a lower drought risk premium, and borrowers' credit rating of investment grade can act as a mitigating factor on drought risk effects. Our study highlights that externalities from local weather shocks are relevant to the private debt market.