Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • 2020
  • Working Paper

Weak Credit Covenants

By: Victoria Ivashina and Boris Vallée
  • Format:Print
  • | Language:English
ShareBar

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.

Keywords

Loan Contracts; Debt Covenants; Creditor Governance; Credit; Agreements And Arrangements; Leveraged Buyouts

Citation

Ivashina, Victoria, and Boris Vallée. "Weak Credit Covenants." NBER Working Paper Series, No. 27316, June 2020. (R&R at the Journal of Financial Economics.)
  • Read Now

About The Authors

Victoria Ivashina

Finance
→More Publications

Boris Vallee

Finance
→More Publications

More from the Authors

    • December 2020
    • Journal of Finance

    Monetary Policy and Global Banking

    By: Falk Bräuning and Victoria Ivashina
    • October 2020
    • Faculty Research

    TowerBrook: ESG in Action (B)

    By: Victoria Ivashina, Brian Trelstad and Meaghan Conway
    • October 2020
    • Faculty Research

    TowerBrook: ESG in Action (A)

    By: Victoria Ivashina, Brian Trelstad and Meaghan Conway
More from the Authors
  • Monetary Policy and Global Banking By: Falk Bräuning and Victoria Ivashina
  • TowerBrook: ESG in Action (B) By: Victoria Ivashina, Brian Trelstad and Meaghan Conway
  • TowerBrook: ESG in Action (A) By: Victoria Ivashina, Brian Trelstad and Meaghan Conway
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Digital Accessibility
Copyright © President & Fellows of Harvard College