A bank covenants pricing model

Flavio Bazzana ()
Additional contact information
Flavio Bazzana: DISA, Faculty of Economics, Trento University

No 124, Quaderni DISA from Department of Computer and Management Sciences, University of Trento, Italy

Abstract: Covenants are particular clauses in firms' debt contracts that restrict business policy, giving creditors the possibility to put specific action into force when the covenants are violated. Three main reasons are accounted for in the literature: (1) covenants resolve the conflicts of interest between shareholders and bondholders, (2) they are used as instruments of business policy and (3) they are used as credit monitoring by the banks. Using this instrument the banks can also reduce the expected loss rate of the loan, offering a lower rate to the firm. In order to calculate the spread the bank must estimate the probability of covenant violation and the contribution of the covenant to the LGD when the firm respects this constraint. As a consequence, the bank can modify the elr of the loan without asking the firm for more collateral, and by choosing a combination of the financed part and of the limit of the financial ratio.

Date: 2007-12, Revised 2008-06-16
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.unitn.it/files/download/10535/124.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.unitn.it/files/download/10535/124.pdf [302 Found]--> https://www.unitn.it/files/download/10535/124.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:trt:disatr:124

Ordering information: This working paper can be ordered from
DISA Università degli Studi di Trento via Inama, 5 I-38122 Trento TN Italy
http://www.unitn.it/disa

Access Statistics for this paper

More papers in Quaderni DISA from Department of Computer and Management Sciences, University of Trento, Italy Contact information at EDIRC.
Bibliographic data for series maintained by Roberto Gabriele ().