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  • 2020
  • Working Paper

Weak Credit Covenants

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

Leveraged Loans; Loan Contracts; Debt Covenants; Carve-out; Creditor Governance; LBO; Credit; Agreements and Arrangements; Leveraged Buyouts

Citation

Ivashina, Victoria, and Boris Vallée. "Weak Credit Covenants." NBER Working Paper Series, No. 27316, June 2020.
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About The Authors

Victoria Ivashina

Finance
→More Publications

Boris Vallee

Finance
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    High-Yield Debt Covenants and Their Real Effects

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More from the Authors
  • Weak Corporate Insolvency Rules: The Missing Driver of Zombie Lending By: Bo Becker and Victoria Ivashina
  • Big Blue: Starting a Real Estate Firm By: Boris Vallée and Sean Bracken
  • High-Yield Debt Covenants and Their Real Effects By: Falk Bräuning, Victoria Ivashina and Ali Ozdagli
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