Corporate loans increasingly have become an important part of portfolio management with the advent of a liquid and transparent secondary market. This paper examines the pricing of characteristics and betas in the cross-section of expected loan returns. Expected loan returns decrease with default beta. Default beta contains information not captured by rating or spread-to-maturity. Among loan characteristics, a 3-month formation momentum strategy earns a monthly premium of 122 bps. Momentum is prominent in loans issued by the lowest-rated borrowers.

We find that banks with capital and liquidity constraints are more likely to use credit risk transfer (CRT) instruments, including the credit derivative and the secondary loan markets. Relationship lenders and lead syndicate lenders are more likely to hold loans on their balance-sheets regardless of borrowers' riskiness. Finally, we find a separating equilibrium in the CRT market: loans to ex-ante riskier borrowers are more likely to be sold and loans to safer borrowers are more likely to be hedged with CDS. We view credit derivatives and loan sales as joint choice variables in determining the hedging instrument to use.

We study how financial distress of a significant customer impacts capital structure of suppliers. Using a sample of U.S. firms that filed for Chapter 11 between 1980 and 2013, we find that the suppliers of these firms increase their leverage ratio over the two years prior to the filing date. This change is economically significant and consistent with the bargaining power theory, which states that an increase in suppliers' debt decreases the surplus available for negotiations. Therefore, suppliers increase their financing leverage to fortify their bargaining power with significant, distressed customers. We also find evidence that suppliers reduce their leverage after the customer reorganizes its liabilities and capital structure in the Chapter 11 process, indicating a return to a previous status quo.