Restrictive Clauses in Loan Contracts: A Sequential Stackelberg Game Interpretation

Michèle Breton () and Tiguéné Nabassaga
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Michèle Breton: HEC Montréal
Tiguéné Nabassaga: HEC Montréal

Dynamic Games and Applications, 2025, vol. 15, issue 1, No 2, 28-47

Abstract: Abstract We propose a dynamic stochastic game model to assess the value of restrictive clauses in private loan contracts. Restrictive clauses are used by lenders to mitigate their credit risk, for instance, by linking the interest payments of the borrower to some observable performance measure. We show how the value of these clauses for the lender and the borrower corresponds to the solution of a feedback Stackelberg game in discrete time. We consider two instances of restrictive clauses that are commonly found in the syndicated loan market, namely safety covenants and performance pricing, and provide numerical illustrations using representative instances to compare their relative efficiency.

Keywords: Stackelberg game; Finance; Loan contract; Covenant; Credit risk (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s13235-025-00626-6

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