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Journal of Financial Services Research

Erschienen in:

22.03.2019

Debt Renegotiation and the Design of Financial Contracts

verfasst von: Christophe J. Godlewski

Erschienen in: Journal of Financial Services Research | Ausgabe 2-3/2019

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Abstract

This study examines the design of financial contracts after renegotiations. It focuses on the degree of renegotiation as measured by the number of amendments to the contract. I find that the design of renegotiated financial contracts is not homogenous, although the most frequent amendments are to the loan’s amount and maturity. I show that the number of amendments increases with longer maturities. Collateral and bank reputation have the opposite effect. Creditors friendly environments with fewer renegotiation frictions increase the number of amendments. Overall, contractual, organizational, and legal features have a significant influence on the design of financial contracts after renegotiation.

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Appendix 1 provides details on amended terms and how they were aggregated into the main categories.

There are 57 different and unique renegotiation packages in the sample. I present here only the ones that account for at least 1% of the sample. Additional analyses of specific amendments are provided in subsection 3.2.

Appendix 2 provides the definitions for all variables.

The average size of a syndicate, as measured by the number of lenders, is 15.

The average number of renegotiation rounds is two, while the average duration between renegotiation rounds is two years and eight months.

There is an equal split between borrowers from English and French common law countries (35% each), while 19% of the borrowers are from German law countries.

All regressions include control variables for loans’ main currency (USD or GBP), type (revolving), purpose (acquisition, general corporate, LBO, debt refinancing, working capital), and amendment year as well as the borrowers’ industry sector and country. The number of renegotiation rounds and the time duration between rounds are also included but not displayed. The legal origin of the borrower country (French or German) is also included in regressions (4) to (7) but not displayed.

I also test for the impact of the loan spread and find it is not significant without altering other coefficients, but it drastically reduces the sample size. For these reasons I do not include the spread in the regressions. Similar conclusions apply regarding the number of lenders (without the impact on sample size) that is why I keep the variable Concentration in all the regressions.

I do not include country fixed effects in these regressions as I include country-level variables.

Standard errors are now clustered at the borrower level. I also omit the Listed variable as borrower variables are available for listed companies only.

Standard errors are now clustered at the loan agent level.

Notice that the effect of the TC Equity Ratio vanishes when taking all lead bank variables into account together.

Due to sample size limitations, I am unable to provide reliable results for models with borrower or lender characteristics. The results are available in the online appendix.

Loan types and purposes are considered as control variables in previous analyses. Due to sample size I cannot provide reliable results for models with renegotiation frictions, borrower, or lender variables. The results are available in the Supplementary Material.

Regarding loan and syndicate characteristics at origination, revolving loans have shorter maturities, less covenants, are less often secured, have less reputable lead banks, and often more lenders from the same country than term loans on average.

I also focus on debt refinancing for statistical reasons as it is the main loan purpose in the sample and therefore I must regroup all other purposes. I cannot perform more-detailed analysis on these other loan purposes.

Due to sample size issues I cannot provide reliable results for models with borrower or lender variables.

These additional results are available from the author on request.

Due to sample size issues I cannot provide reliable results for models with borrower or lender variables.

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Titel: Debt Renegotiation and the Design of Financial Contracts
verfasst von: Christophe J. Godlewski
Publikationsdatum: 22.03.2019
Verlag: Springer US
Erschienen in: Journal of Financial Services Research / Ausgabe 2-3/2019
Print ISSN: 0920-8550
Elektronische ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-019-00311-x

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