Debt covenants and credit spread valuation: The special case of Chinese global bonds

Chang, Sean Tat; Ross, Donald

doi:10.1016/j.gfj.2016.05.004

Cited by 2 publications

(5 citation statements)

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“…It is therefore possible that creditors may view financial and non-financial covenants differently at the time of assessing the risk of securities and that they have different implications for the pricing process. Evidence to support these hypotheses has been reported by Chang and Ross (2016), who conducted tests with market analysts and found Rev. Bras.…”

Section: Introductionmentioning

confidence: 80%

“…Thus, one possible result of the inclusion of these clauses is a reduction in the risk premium charged by creditors, improving the cost payable for debt taken on by issuing bonds (Reisel, 2014). Consistent with this line of reasoning, Reisel (2014), Bradley and Roberts (2015), Chang and Ross (2016), Gong et al (2015), and Simpson and Grossmann (2017) have found that creditors price debt contracts that contain restrictive covenants favorably.…”

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 90%

“…Additionally, Chang and Ross (2016) have observed that covenants do not only protect creditors from the risks of agency conflicts and insolvency, but they also protect against risks of bankruptcy and information asymmetry in debt contracting. Of these aspects, Chang and Ross (2016) found that the risk of bankruptcy has the greatest influence on the pricing of debt securities by market analysts. Based on these findings, it can be inferred that covenants employing financial indicators that measure debt coverage, debt level, and financial performance generally tend to be relevant to pricing debt securities, since these indicators are correlated with the firm's risk of bankruptcy.…”

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 99%

“…Finally, Chang and Ross (2016) interviewed debt market analysts to test how they attributed pricing to covenants. They found that the analysts priced bonds with covenants to protect creditors' interests favorably and that the aspect of risk that was most relevant to bond valuation was protection against the risk of issuer bankruptcy.…”

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 99%

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The Double Role of Financial Covenants in Bond Issues in Brazil

Konraht

Soares

2020

RBGN

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Purpose-This study aims to identify the relationship between the use of financial covenants and the cost of borrowing via bonds issued by firms in Brazil. Design/methodology/approach-The sample comprised 269 bond series issued by 106 publicly-listed companies from 2010 to 2016. Covenants were sampled manually from the indentures and prospectuses of these issues. A distinction was made between covenants that must be fulfilled by the firm issuing the debt and those that create obligations for another firm that has a secondary liability to the issuer's creditors. A linear regression model was constructed to test the relationships between these covenants and the spreads paid on the bonds. Findings-The results indicate that covenants that must be observed by the issuer are used as a complementary mechanism to the risk premium charged by creditors. In turn, covenants that bind guarantors constitute a mechanism to substitute the risk premium, reducing the spread. These findings show that financial covenants play a double role in bond issues in Brazil and that the role varies depending on the firm that is responsible for complying with the covenant. Originality/value-This paper contributes to the literature by showing that the effect of financial covenants on the cost of debt varies as a function of which firm must fulfill the covenant. It therefore demonstrates that it is essential to control for the responsibility to fulfill covenants when measuring their effect on the cost of debt.

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Section: Introductionmentioning

confidence: 80%

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 90%

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 99%

Section: Review Of the Literature And Formulation Of Hypothesesmentioning

confidence: 99%

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The Double Role of Financial Covenants in Bond Issues in Brazil

Konraht

Soares

2020

RBGN

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“…O terceiro direcionador mais representativo é o nível de endividamento, que avalia a proporção de capital de terceiros em relação ao ativo. inadimplência, possibilitando identificar os riscos de falência e assimetria informacional na contratação de dívida(CHANG; ROSS, 2016).Em relação ao nível de governança corporativa,Neis, Maragno e Borba (2016) identificaram que os covenants mais utilizados pelos credores são a cobertura da dívida, cobertura de juros e índice de liquidez. Oliveira e MonteMor (2020) evidenciaram que as companhias listadas nos níveis diferenciados de governança corporativa da B3 apresentam menor probabilidade de violarem os covenants financeiros do que as demais companhias não listadas nos respectivos níveis Oliveira et al (2020).…”

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Influência dos direcionadores na violação dos covenants contábeis nas empresas do setor de utilidade pública e bens industriais

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The accountingbased covenants are contracting terms established in debt agréments, generally expressed in accounting ratios, intending to restrict debtor's activities. The covenants function is to reduce both the acting conflicts and uncertainties regarding company future performance.After consulting academic literature, it was observed that the covenants drivers represent a information set allowing to follow company financial performance. However, studies identifiying all the covenants' drivers related to these restrictive terms violation, concerning public utility sector and industrial goods were not found. Thus, this study objective is to identify and analyze which covenants drivers influence the probability of companies violating the contractual terms. When the company fails to comply with the contractual clauses established in the contracts, covenants are broken and creditors are entitled to demand the company's immediate debt settlement, resulting in consequences for the company. To identify which drivers influence the probability of breach of covenants, the explanatory notes of companies belonging to the public utility and industrial goods sector were analyzed to verify those that had these contractual clauses and, subsequently, the data was collected through Economática to calculate the drivers of the covenants.The results indicate the following variables influencing covenants violation: Total Assets, Financial Expense, ShortTerm Loans, Total Net Debt, Equity, Financial Result, LongTerm Loans and Audit. These results are useful to managers, shareholders and creditors, as they reveal informations on financial performance, companies capacity to honor their financial commitments. Furthermore, they also serve as indicators to assess the possibility of contractual terms violation.

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Debt covenants and credit spread valuation: The special case of Chinese global bonds

Cited by 2 publications

References 117 publications

The Double Role of Financial Covenants in Bond Issues in Brazil

The Double Role of Financial Covenants in Bond Issues in Brazil

Influência dos direcionadores na violação dos covenants contábeis nas empresas do setor de utilidade pública e bens industriais

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