Renegotiation Costs And Debt Contract Design
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| Author | : Elia Ferracuti |
| Publisher | : |
| Total Pages | : 68 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
We exploit plausibly exogenous variation in the tax consequences of renegotiating U.S. syndicated loans to isolate the effect of renegotiation costs on initial contract terms. TD9599 materially reduced the tax burden of renegotiating U.S. syndicated loans, while leaving the taxation of renegotiating U.S. single-lender and non-U.S. syndicated loans unchanged. In this setting, we examine the implications of incomplete contracting theory for debt contract design. Consistent with incomplete contracting theory, we find that, as renegotiation costs fall, the maturity of debt contracts lengthens, the likelihood of covenant violation increases, and the use of performance pricing provisions becomes less frequent.
| Author | : Daniel Andres Saavedra Lux |
| Publisher | : |
| Total Pages | : 71 |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
I investigate whether and how expected future contract renegotiation considerations affect the type of covenants used in ex-ante debt contracts. I find that when future contract renegotiation costs are expected to be high, debt contracts are less likely to include covenants that restrict the borrower's financial flexibility in good states. This finding suggests that when renegotiation costs are high, borrowers and lenders avoid the use of covenants that are more likely to hold up the borrower and force it to bypass value-enhancing corporate policies (e.g., investments). Consistent with this interpretation, the negative relationship between renegotiation costs and the presence of flexibility-reducing covenants becomes stronger when the borrower has fewer outside options and financial flexibility becomes more valuable. Finally, I find that when future renegotiation costs are expected to be high, debt contracts have more covenants that are directly linked to the current performance of the borrower, which allows for a more efficient allocation of decision rights between the borrower and lenders. Overall, this study provides initial evidence about how renegotiation considerations affect the design of covenant packages in debt contracts.
| Author | : Nicolae Garleanu |
| Publisher | : |
| Total Pages | : 36 |
| Release | : 2005 |
| Genre | : |
| ISBN | : |
We analyze the design and renegotiation of covenants in debt contracts as a particular example of the contractual assignment of property rights under asymmetric information. In particular, we consider a setting where future firm investments are efficient in some states, but also involve a transfer from the lender(s) to shareholders. While there is symmetric information regarding investment efficiency, managers are better informed about any potential transfer than the lender. The lender can learn this information, but at a cost. In this setting, we show that the simple adverse selection problem leads to the allocation of greater ex-ante decision rights to the uninformed party than would follow under symmetric (in particular, full) information. Consequently, ex-post renegotiation is in turn biased towards the uninformed party giving up these excessive rights. In many settings, this result yields the opposite implication from standard Property Rights results regarding contracting under incomplete contracts and ex-ante investments, whereby rights should be allocated to minimize inefficiencies due to distortions in ex-ante investments. Indeed, for debt contracts as well as other settings, the uninformed party, who receives strong decision rights in our setting, is likely to have few significant ex-ante investments to undertake relative to the informed party.
| Author | : G. Chiesa |
| Publisher | : |
| Total Pages | : |
| Release | : 1988 |
| Genre | : Economics |
| ISBN | : |
| Author | : Nicolae Gârleanu |
| Publisher | : |
| Total Pages | : |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
We analyze the design and renegotiation of covenants in debt contracts as a specific example of the contractual assignment of property rights under asymmetric information. Specifically, we consider a setting where managers are better informed than lenders regarding potential transfers from debt to equity associated with future investments. This simple adverse-selection problem leads to the allocation of greater ex ante decision rights to the creditor (the uninformed party), i.e., tighter covenants, than would follow under symmetric information. This corresponds well to empirical evidence indicating that covenants are very tight upon inception and are frequently waived (and never tightened) upon renegotiation.
| Author | : Florina Silaghi |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Despite important advantages debt financing entails a risk of impossibility of payment. Bankruptcy and foreclosure are costly not only for the borrower and the lender, but also to the community as a whole through contagion and negative externality effects. Renegotiation then arises as a win-win solution for the parties involved. This thesis focuses on the analysis of debt renegotiation for the cases of corporate debt and home mortgage debt. To our knowledge, all the previous work on corporate debt renegotiation implies an infinite number of renegotiations. This feature preempts the analysis of the optimal number of renegotiations. We address this drawback by incorporating fixed renegotiation costs in a structural model of multiple renegotiations, analyzing the optimal debt reduction, timing and the number of rounds. Regarding home mortgage renegotiation, we contribute to the debate about the current foreclosure crisis by studying a lender's decision to renegotiate or to foreclose, and the negative effect of foreclosure on house prices. Finally, the role of securitization in foreclosure and renegotiation decisions, as well as servicer contract design are investigated.
| Author | : |
| Publisher | : |
| Total Pages | : 68 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
Using a hand-collected sample of private debt contracts between U.S. publicly traded firms and financial institutions, I examine the role of accounting in the renegotiation of debt contracts following a positive shock to the borrower's credit quality. I find that, following a positive shock to their credit quality, firms with more timely reporting of good news are more likely to renegotiate their loan contracts and they do so sooner than firms with less timely good news reporting. Further, these effects are more pronounced for firms whose positive shocks can be more credibly communicated through financial reporting. My paper contributes to the literature on the role of accounting information in debt contract renegotiations.
| Author | : Chris Armstrong |
| Publisher | : |
| Total Pages | : 54 |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
We examine how firms' contractual relationships with their employees affect the design of their debt contracts, and their use of financial covenants and pricing grids in particular. Viewing the firm as nexus of both explicit and implicit contractual relationships, we argue that managers internalize their employees' preferences when negotiating contractual terms with creditors. An increase in unemployment insurance benefits reduces employees' cost of job loss which, in turn, allows managers to take more risk. We find that loans initiated following an increase in unemployment insurance benefits are more likely to include performance rather than capital covenants and are more likely to include pricing grids based on financial (i.e., profitability) ratios rather than credit ratings. Overall, our study demonstrates how the design of debt contracts changes in response to arguably exogenous changes in employees' collective tolerance -- and, in turn, managers' preferences -- for risk.
| Author | : Gary B. Gorton |
| Publisher | : |
| Total Pages | : 50 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
Empirical evidence suggests that banks playa unique role in the savings-investment process, affecting firms' cost of capital and the level of investment. We argue that bank uniqueness is related to how the design of bank loan contracts allows banks to affect borrowers' choice of project risk. Unlike corporate bonds, bank loans are typically secured senior debt which contain embedded options allowing the bank to quot;callquot; the loan. The option allows the bank tv control borrowers' risk-taking activity via renegotiation of the loan. We analyze the renegotiation outcomes and show that: (1) debt forgiveness occurs; (2) monitoring by the bank is not always successful in preventing the borrower from increasing risk; (3) renegotiated interest rates are not monotonic in borrower type; (4) inefficient liquidation can occur. In renegotiation seniority and collateral are crucial because they allow the bank to threaten the borrower and liquidate inefficient projects. We show that when a prepayment option is included in the bank loan contract, bank debt is more valuable (ex ante) to borrowing firms than corporate debt; it lowers the cost of capital.
| Author | : Gary Gorton |
| Publisher | : |
| Total Pages | : 45 |
| Release | : 1993 |
| Genre | : Bank loans |
| ISBN | : |
