Journal of Credit Risk

Usage and exposures at default of corporate credit lines: an empirical study

Janet Yinqing Zhao, Douglas W. Dwyer and Jing Zhang


Using a unique data set pooled from multiple US financial institutions, we empirically study the credit line usage of middle-market corporate borrowers. We find that defaulted borrowers draw down more of their lines than nondefaulted borrowers. They also increase their usage when approaching default. Riskier borrowers tend to utilize a higher percentage of their credit lines. We find that firms rated as "pass" grade by the lender draw down the credit lines more than those rated below "pass" grade. Usage ratios also vary by collateral type, commitment size, loan purpose type and prior quarter's usage. Further, we find evidence that usage ratios are higher during economic downturns. The evidence is stronger for nondefaulted firms than for defaulted firms. Taken together, these results suggest that credit line usage is a function of both borrowers' characteristics and banks' monitoring and control of these lines.