Securities Laws, Bank Monitoring, and the Choice Between Cov-lite Loans and Bonds for Highly Levered

Abstract

At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w25467.ack NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Interest Rates and the Design of Financial Contracts

“…More precisely, covenant-lite loans eschew maintenance covenants, which are violated if the borrower breaches a specified financial threshold (e.g., debt-to-EBITDA ratio) for any reason, in favor of incurrence covenants which are breached only when corrective action is not undertaken. See Becker and Ivashina (2017), Berlin, Nini, and Yu (2020), and Prilmeier and Stulz (2020) for more details on covenant-lite loans.…”

“…Studies of bank lending focus on the implications of market imperfections for loan pricing and other aspects loan contracts. 1 In contrast, studies 1 In addition to the aforementioned papers on loan pricing, a number of studies investigate particular aspects of corporate debt contracts including: pricing (e.g., Asquith, Beatty, and Weber (2005), Drucker and Puri (2009), Berg, Saunders, and Steffen (2016)), maturity (e.g., Flannery (1986), James (1987), Stohs and Mauer (1996), Demirguc-Kunt andMaksimovic (1999), Fan, Titman, andTwite (2012), Li, Loutskina, and Strahan (2021)), collateral (e.g., Benmelech and Bergman (2008), Benmelech (2009)), and covenants (e.g., Smith and Warner (1979), Malitz (1986), Berlin and Mester (1992), Bradley and Roberts (2015), Becker and Ivashina (2017), Green (2018), Berlin, Nini, and Yu (2020), Prilmeier and Stulz (2020)). Recent work in the macrofinance literature examines the interaction between debt contracts and the transmission of economic shocks (e.g., Chodorow-Reich and Falato (2020), Greenwald (2019)) and the effects of low rates on bank lending (e.g., Balloch and Koby (2020), Wang et al (2020)).…”

Interest Rates and the Design of Financial Contracts

“…Studies of bank lending focus on the implications of market imperfections for loan pricing and other aspects loan contracts. 1 In contrast, studies 1 In addition to the aforementioned papers on loan pricing, a number of studies investigate particular aspects of corporate debt contracts including: pricing (e.g., Asquith, Beatty, and Weber (2005), Drucker and Puri (2009), Berg, Saunders, and Steffen (2016)), maturity (e.g., Flannery (1986), James (1987), Stohs and Mauer (1996), Demirguc-Kunt andMaksimovic (1999), Fan, Titman, andTwite (2012), Li, Loutskina, and Strahan (2021)), collateral (e.g., Benmelech and Bergman (2008), Benmelech (2009)), and covenants (e.g., Smith and Warner (1979), Malitz (1986), Berlin and Mester (1992), Bradley and Roberts (2015), Becker and Ivashina (2017), Green (2018), Berlin, Nini, and Yu (2020), Prilmeier and Stulz (2020)). Recent work in the macrofinance literature examines the interaction between debt contracts and the transmission of economic shocks (e.g., Chodorow-Reich and Falato (2020), Greenwald (2019)) and the effects of low rates on bank lending (e.g., Balloch and Koby (2020), Wang et al (2020)).…”

Three essays on corporate finance

“…These reasons are not directly linked to firm's CSR performance. Furthermore, unlike conventional loan covenants, cov-lite loans are event-based but not maintenance covenants (Prilmeier and Stulz, 2019). Cov-lite loans only require the firm to comply with its financial covenants when a firm sells its assets, issues additional financing, etc.…”