Weak Credit Covenants

Victoria Ivashina and Boris Vallee

No 27316, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using novel data on 1,240 credit agreements, we investigate sources of contractual complexity in the leveraged loan market. While negative covenants are widespread, carve-out and deductible clauses that weaken them are as frequent. We propose simple measures of contractual weakness, which uniquely explain the market-wide price reaction that followed the 2017 J.Crew restructuring, a high profile use of such contractual elements. Leveraged buyouts have significantly weaker loan agreements, and a larger non-bank funding of a loan is conducive to weaker contractual terms. Weak covenants translate to modestly higher issuance spreads. Overall, our findings are consistent with sophisticated borrowers catering to a reaching-for-yield phenomenon by exploiting contractual complexity.

JEL-codes: G23 G32 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban
Note: CF
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Citations: View citations in EconPapers (8)

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