Transfer Pricing Research Series

Assessing the credit risk of the borrower or obligor in any intra-group financial transactions is a critical first step.  The problem is that credit risk is subjective and that a credit rating is not necessarily how an arm's length lender will measure credit risk.  Similarly, there are other common perceptions about other borrower and loan characteristics impact on the pricing of intercompany loans.

Our experts will conduct research and test different hypotheses surrounding credit risk and other issues that have implications for transfer pricing purposes.  The results of this research will be published here.  Our current project is outlined below.

Is an estimated or implied credit rating sufficient for pricing inter-company financial transactions?

Hypothesis

If we know the credit rating of the borrower and/or of the debt instrument then we would know the market interest rate, with a high degree of accuracy.

Analysis

We will be examining all loans executed by B to BBB rated companies during 2009 to 2014 period which were filed with the US Securities and Exchange Commission. If the hypothesis is correct then the market lending margins for each credit rating category, before adjusting for tenor and other differences in the loan transactions, should be in a very tight range of values. We will repeat this research using corporate bond issues.

Result

Results will be published upon completion of our analysis.

Implication

Implications will be published upon completion of our results.

Recent Publications

  • Intercompany Financial Transactions:

    Factors to Consider In Analyzing the Impact of Implicit Support
    (Bloomberg BNA: 20/2/2014)

  • Transfer Pricing and Intra-group Cash Pooling:

    (Bloomberg BNA: 14/2/2011)

  • Intercompany Financial Transactions:

    Selecting Comparable Data 
    (Bloomberg BNA: 22/4/2010)

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