Institutional Investors and Loan Dynamics: Evidence from Loan Renegotiations

Beyhaghi, Mehdi; Nguyen, Ca; Wald, John K.

doi:10.2139/ssrn.2989972

Cited by 6 publications

(8 citation statements)

References 68 publications

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“…Osborn, 2014) or is driven by observations during the financial crisis period (e.g. Demiroglu andJames, 2015 andBeyhaghi et al, 2017). Focusing on the financial crisis years, we reproduce some existing results and also examine other evidence for bargaining frictions.…”

Section: Negotiation Frictions During the Financial Crisismentioning

confidence: 56%

“…43 Demiroglu and James (2015) and Osborn (2014) show that the presence of a CLO is positively related to the likelihood that a borrower enters Chapter 11 rather than restructures outside of bankruptcy, which we confirm in our sample that we describe below. Beyhaghi et al (2017) show that nonbank lenders are more likely to exit a syndicate than participate in a renegotiated loan, and Paligorova and Santos (2018) show that a larger share of unaffiliated nonbank investors reduces the likelihood of a loan being renegotiated.…”

Section: Institutional Term Loan Syndicatesmentioning

confidence: 99%

“…11 Demiroglu and James (2015), Osborn (2014), Beyhaghi et al (2017), and Paligorova and Santos (2018) each example, during 2006-2010, the average fee paid to amend a loan following a covenant violation was more than three times larger for borrowers with an institutional loan. Our reading of the loan agreements also uncovers the increased use of alternative contractual features designed to facilitate renegotiation of core loan terms.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Concentration of control rights in leveraged loan syndicates

Berlin

Nini

2020

Journal of Financial Economics

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We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants-so-called covenant-lite loans-borrowing firms' revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.

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Section: Negotiation Frictions During the Financial Crisismentioning

confidence: 56%

Section: Institutional Term Loan Syndicatesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Concentration of control rights in leveraged loan syndicates

Berlin

Nini

2020

Journal of Financial Economics

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“…Non-commercial banks lenders are further classified into six different types: investment banks, finance companies, insurance companies, hedge funds, mutual funds and CLOs. Following Lim et al (2014) and Beyhaghi et al (2019), we create Nonbank Syndicate, an indicator variable that equals 1 if the lending syndicate has at least one non-commercial bank lender. To measure borrower-bank relationship, we count the number of loans a borrower has with a particular lead bank, relative to the total number of loans taken out by the borrower in the past five years.…”

Section: Additional Controlsmentioning

confidence: 99%

Confidentiality in loan credit agreements

Nguyen

Pacheco

2021

IJMF

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PurposeThis study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.Design/methodology/approachUsing a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.FindingsBorrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.Originality/valueThis study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.

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“…Renegotiation is particularly important when negative shocks occur and borrower credit quality deteriorates because covenants, which are set very tightly ex ante, are renegotiated ex post to avoid further deterioration in the borrowers' performance (Chava and Roberts 2008;Denis and Wang 2014). Renegotiation may be particularly important for loans that are traded in the secondary market, which have been shown to impose particularly restrictive ex ante conditions on borrowers (Drucker and Puri 2008) and is believed to be typically led by banks (Beyhaghi, Nguyen, and Wald 2019). Unfortunately, banks and CLOs, which hold over half of the outstanding syndicated loans, have regulatory incentives to sell deteriorating loans rather than engaging with the borrowers.…”

Section: Introductionmentioning

confidence: 99%

Ownership Concentration and Performance of Deteriorating Syndicated Loans

Giannetti

Meisenzahl

2021

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Regulation and capital constraints may force banks and collateralized loan obligations (CLOs) to sell deteriorating loans, potentially hampering renegotiation and amplifying the initial negative shock to the borrower. We show that banks and CLOs sell downgraded loans to mutual funds and hedge funds. The reallocation of loan shares favors the syndicate's concentration, increasing lenders' incentives to renegotiate. However, syndicates remain less concentrated when potential buyers experience financial constraints and subsequently loans are less likely to be amended and more likely to be downgraded even further. Our findings indicate that existing regulations may amplify shocks to credit quality during periods of generalized distress in the financial system.

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Institutional Investors and Loan Dynamics: Evidence from Loan Renegotiations

Cited by 6 publications

References 68 publications

Concentration of control rights in leveraged loan syndicates

Concentration of control rights in leveraged loan syndicates

Confidentiality in loan credit agreements

Ownership Concentration and Performance of Deteriorating Syndicated Loans

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