Weak Credit Covenants / Victoria Ivashina, Boris Vallee.

Format:

Book

Author/Creator:

Ivashina, Victoria.

Contributor:

National Bureau of Economic Research.

Vallee, Boris.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27316.

NBER working paper series no. w27316

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

Using novel data on 1,240 credit agreements, we investigate sources of contractual complexity in the leveraged loan market. While negative covenants are widespread, carve-out and deductible clauses that weaken them are as frequent. We propose simple measures of contractual weakness, which uniquely explain the market-wide price reaction that followed the 2017 J.Crew restructuring, a high profile use of such contractual elements. Leveraged buyouts have significantly weaker loan agreements, and a larger non-bank funding of a loan is conducive to weaker contractual terms. Weak covenants translate to modestly higher issuance spreads. Overall, our findings are consistent with sophisticated borrowers catering to a reaching-for-yield phenomenon by exploiting contractual complexity.

Notes:

Print version record

June 2020.