Arguments 2

Much corporate debt is not marketable. It consists of loans made by banks and other financial institutions. Therefore, investors cannot undo excessive leverage because they cannot purchase a proportionate share of the outstanding claims (stock and debt) against the firm's income. Many institutional investors such as banks and life insurance companies cannot legally purchase low-rated bonds such as those issued by a highly levered corporation. Therefore the interest rates on highly rated, "investment grade" bonds are significantly lower than those on more risky bonds.