Creditor Control Rights and Borrower Protection: The Role of Borrower Consent Clause in Private Debt Contracts

Abstract

In private debt contracts with a borrower consent clause, a creditor’s decision to transfer its portion of the loan can be thwarted if the borrower denies the consent to loan transfer. We find that the probability of the inclusion of a borrower consent clause in a private debt contract increases in the intensity of accompanying creditor control rights in the contract. This association is more pronounced for larger and less risky borrowers. We also find that loans with a borrower consent clause have lower secondary market liquidity and larger stock market returns around the announcement of the loans. We argue that consent clauses are important contractual innovations that are created to protect borrowers in response to the rise of the originate-to-distribute model of banking and the recent increase in nonbank investors’ interest in the corporate loan market.