Agree to disagree: Lender equity holdings, within-syndicate conflicts, and covenant design

Yongqiang Chu, Luca X. Lin and Zhanbing Xiao

Journal of Financial Intermediation, 2024, vol. 57, issue C

Abstract: Lenders’ simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. We argue that lenders address such within-syndicate conflicts with financial covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance-based covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflict loans rely more on capital-based covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Overall, these results suggest that such conflicts can reduce capital flexibility and renegotiation efficiency for the borrowers.

Keywords: Within-syndicate conflicts; Dual holders; Loan covenants (search for similar items in EconPapers)
JEL-codes: G23 G32 G34 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:57:y:2024:i:c:s1042957323000487

DOI: 10.1016/j.jfi.2023.101065

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