Abstract
I study the impact of bank loan renegotiation on the design of financial contracts. Debt renegotiation can be beneficial for borrowers and lenders but its impact on the design of financial contracts is less clear. However, contract design is crucial for borrower’s investment, operating and financing policies. I find that the design of renegotiated credit agreements is not homogenous. Main renegotiation packages contain amendments to loan amount and maturity. I show that secured loans with longer maturities experience broader amendments. Creditors’ friendly environment and the presence of reputable, sound, and profitable lenders have a similar effect.
Highlights
By their nature, loans are flexible contracts that can be revised and amended from time to time and this flexibility is considered one of the major advantages of corporate financing through bank loans
Are amendments marginal, with few loan characteristics being renegotiated? Or on the contrary, are all contract terms amended during a renegotiation? This is a crucial issue because of the role of debt contract design for firm’s investment, operating and financing policies, with important consequences for the company’s stakeholders
The main explanations for these findings are related to the impact of contractual frictions on contract design following renegotiation
Summary
Loans are flexible contracts that can be revised and amended from time to time and this flexibility is considered one of the major advantages of corporate financing through bank loans. The willingness for concessions will depend on the borrower’s investment, operational and financial conditions, the potential agency problems, and the lenders situation These elements depend on the bargaining power of the borrower and the lender(s), the contractual allocation of control and decision rights, the informational frictions shaping the initial contract design, and the adverse effects of ex ante incentives. To capture those features, I focus on four categories of variables related to the loan and syndicate structure at origination, the legal environment of the borrower country, and the borrower and lenders financial conditions.
Sign-in/Register to view highlights & summary 
Submitted Version (
Free)
Published Version
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call