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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

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.)
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About The Authors

Victoria Ivashina

Finance
→More Publications

Boris Vallee

Finance
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More from the Authors

    • 2021
    • Faculty Research

    The Effects of Local Government Financial Distress: Evidence from Toxic Loans

    By: Boris Vallée and Julien Sauvagnat
    • 2021
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    FinTech Lending and Cashless Payments

    By: Boris Vallée, Pulak Ghosh and Yao Zeng
    • December 2020
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    Monetary Policy and Global Banking

    By: Falk Bräuning and Victoria Ivashina
More from the Authors
  • The Effects of Local Government Financial Distress: Evidence from Toxic Loans By: Boris Vallée and Julien Sauvagnat
  • FinTech Lending and Cashless Payments By: Boris Vallée, Pulak Ghosh and Yao Zeng
  • Monetary Policy and Global Banking By: Falk Bräuning and Victoria Ivashina
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