Loan Deals Research Articles

The impact of board gender composition on loan covenant violations

AbstractResearch Question/IssueWe examine the role of board gender diversity in attenuating loan covenant violations. We also investigate whether the relationship is influenced by female independent directors. Finally, we examine the channels of this relationship.Research Findings/InsightsDrawing on gender socialization and diversity theories, our findings show that firms with gender‐diverse boards are less likely to violate loan covenants. We also find that boards with more female directors have a stronger impact on loan covenant violations than those with fewer female directors, consistent with critical mass theory. Our results also suggest that the negative relationship stems from female independent directors rather than from female executive directors. Our channel analyses indicate that the relationship is routed through covenant strictness, the financial performance of firms, and better corporate governance. Our further analysis demonstrates that the relationship is pronounced in female‐dominated industries and financially distressed firms, as well as in firms whose directors have greater experience. Our results are robust across a series of sensitivity and endogeneity tests.Theoretical/Academic ImplicationsWe contribute to an emerging strand of literature that examines the link between board gender diversity and loan covenants. We fill a gap in this stream of literature by providing the first empirical evidence that female directors in the boardroom reduce loan covenant violations through their greater integrative bargaining skills during loan deals, improving firm financial performance, and ensuring good corporate governance. Our study also contributes to the growing literature on the differential effects on corporate policies of female directors (independent and executive) and critical mass.Practitioner/Policy ImplicationsThis finding offers significant policy implications for managers, investors, and policymakers. Given the growing frequency of loan covenant violations, the presence of a gender‐diverse board should serve as a potent indicator to creditors who have a concern regarding loans. In addition, our study adds to the ongoing debate regarding the business case of board gender diversity.

Stacking ensemble method for personal credit risk assessment in Peer-to-Peer lending

Over the last decade, China’s Peer-to-Peer (P2P) lending industry has been seen as an important credit source but it has recently suffered from a wave of bankruptcies. Using 126,090 P2P loan deals from RenRen Dai, one of the biggest online P2P websites in China, this paper attempts to predict credit default probabilities for P2P lending by implementing machine-learning techniques. More specifically, this study proposes a stacking ensemble machine-learning model to assess credit default risk for P2P lending platforms. A Max-Relevance and Min-Redundancy (MRMR) method is used for feature selection and then irrelevant features are eliminated by using k-means clustering method. Finally, the stacking ensemble model is performed to produce accurate and stable predictions in the feature subset. Experimental results show that stacking ensemble model yields high performance, not only in prediction accuracy but also in precision and recall. In comparison to single classifiers, the stacking ensemble machine-learning model has a minimum error rate and provides more accurate credit default risk prediction. The results also confirm the efficiency of the proposed stacking ensemble model through the area under the ROC curve.

Enablers and barriers of COVID‐19 vaccination efforts in Nepal

AbstractNepal, a landlocked country with a population of 29.1 million faced great socioeconomic, financial, and social hardships during the Coronavirus disease 2019 (COVID‐19) pandemic. Nepal had increasing cases of COVID‐19 despite multiple lockdowns and travel restrictions. Nepal reported 1,000,775 cases and 12,019 deaths till early November 2022. Timely government decisions, strategic political diplomacy, flexible vaccine policy, and multiple loan deals helped Nepal secure the COVID‐19 vaccine from India in a commendable time frame. With the existing structure of the primary health care settings and experience of having implemented childhood vaccination campaigns, Nepal rolled out the COVID‐19 vaccines across the nation on 27 January 2021. However, the delta wave was a devastating blow to South Asia with a high number of hospitalizations and deaths and a complete disruption of the COVID‐19 vaccine supply from India. The government ran a relentless effort in COVID‐19 vaccination and provided full vaccination to 33% of the total population by the end of 2021 and 81.1% by May 2022. The booster doses were administered beginning in 2022, but the campaign efforts have been lethargic with a coverage of only 29.2% and a lack of keen support from the public. The emergence of new variants of the virus continues to pose a challenge in controlling the disease and reopening the country to pre‐pandemic levels of socioeconomic activities.

MDB Loans: A New Asset Class for CLOs

Use of structured financings for balance sheet management by multilateral development banks (MDBs) is still in its infancy. Three path-breaking deals by the African Development Bank (AfDB) and International Finance Corporation (IFC) are leading the way, however. The two AfDB deals are both synthetic, with the loans remaining on the balance sheet despite substantial risk transfers. The IFC transaction allows co-funding of private sector loans with other lenders. New insights and opportunities will certainly emerge with rising experience in MDB loan deals. A few imperatives for a robust MDB collateralized loan obligation (CLO) market are already evident: (i) public disclosure of the relevant parts of proprietary historical MDB loan performance data; (ii) more-transparent rating agency criteria for MDB securitizations, and (iii) greater management, investor, banker, and MDB expertise in this asset class.

COVID Impact to Equity Margin Loans—A Practical Approach to Measure Risk with the Client Behavior Assumptions

Equity margin loan deals are loans to counterparties secured by collateral in the form of equities. Credit exposure arises when the equity collateral falls below the value of loan. During the life of the deal, the counterparty has to give more shares (or cash) to banks or brokerage houses in case of a fall in the share price, so that the level of the collateral amount stays approximately the same and does not deteriorate. The objective of this paper is to attempt to review the risks associated to margin loan deals and propose some suggestions to factor in certain margin call delays or liquidation uncertainties under the stressed COVID-19 situation. Moreover, we also showed a sample practical approach to measure the tail risk of margin loan which included the counterparty’s likely behavior under stress and used a callable bond pricing logic to assess the likely time and moral hazard problem of the counterparty to walk away from margin loans.

The CSPP impact on non-financial firms’ cost of borrowing and debt choice

In this study, we examine the impact of the European Central Bank’s (ECB) corporate sector purchase programme (CSPP) on euro area non-financial firms’ cost of borrowing and choice between bank and public debt. Using a large sample of corporate bonds and syndicated loans closed between 2000 and 2019, we find that the CSPP reduced corporate bond spreads significantly, in both announcement and implementation periods. Findings also suggest that the CSPP had a positive spillover effect into the syndicated loan market during the implementation period. Our results show that there is a substitution effect between eligible bonds and equivalent loans, with non-financial firms choosing to use more corporate bonds than syndicated loan deals after the CSPP announcement, and that this effect is more important for non-switchers, those that may have more difficulty in accessing the bond market. Finally, we provide evidence that, when controlling for the CSPP, borrowers that choose corporate bonds are larger, more profitable, and have larger growth opportunity sets; and switchers with high agency costs of debt prefer bank debt.

The Influence of Digital Finance Development on the Operating Performance of China's Commercial Banks

Taking China's listed commercial Banks as the object of study, using their financial datas from 2014 to 2018, selecting net loan deals and third-party payment transaction scale growth as independent variables, which measure digital level of financial development. profitability and growth rate of non-performing loans to assets as dependent variables, which measure commercial banks operating performance characterization. by establishing the panel data model. To empirically test the impact of digital finance development on the operating performance of China's commercial banks. The empirical results show that the development of digital finance can not only improve the profit margin of commercial banks' assets, but also help reduce their non-performing loan ratio to improve the performance of commercial banks.

The influence of loan officers on loan contract design and performance

We investigate the extent to which loan officers generate independent, individual effects on the design and performance of syndicated loans. We construct a large database containing the identities of loan officers involved in structuring syndicated loan deals, allowing us to systematically disentangle borrower, bank, and loan officer fixed effects. We find that loan officers have significant influence on interest spreads, loan covenant design, and loan performance. Inclusion of borrower fixed effects increases our power to rule out the alternative that loan officer fixed effects reflect the matching of officerds to borrowers based on time-invariant borrower characteristics. We document heterogeneity in loan officers’ influence across loan contract terms, with loan officers exerting stronger influence over covenant package design than over interest spreads, but marginal influence on loan maturity. Lead officers have greater influence than participant officers over covenant package design and loan performance, but less robust differential influence on interest spreads.

China Pushed the Pink Tide and the Pink Tide Pulled China: Intertwining Economic Interests and Ideology in Ecuador and Bolivia (2005–2014)

This article examines the rise of leftist ideology in Ecuador and Bolivia in light of their deepening economic relations with China from 2005 to 2014. First, it reveals that market trends account for trade fluctuations but fail to explain Chinese investment in, and some loan deals with, Ecuador as well as loans to Bolivia. Second, it demonstrates how these forms of funding provided alternatives to U.S.-led international institutions, enabling Rafael Correa and Evo Morales to steer away from Western influence. Third, it contends that four factors led to a cyclic reinforcement of Chinese economic interests and the rise of leftist ideology in Ecuador and Bolivia, namely: mutual complementarity between China’s demand for energy/natural resource supply diversification and Pink Tide development agendas; U.S.–China geopolitical competition for influence in Latin America; China’s experience in engaging with leftist governments from developing countries; and anti-Americanism shaping national identity in Ecuador and Bolivia.

The future of the Russia’s military industry: can “special deliveries”, desperate needs, generous loan deals, and “old love” from Soviet Times keep partnerships running?

ABSTRACT The aim of the study is to analyse both the achievements and chances of survival of the Russian military industry in the upcoming years. The central question at issue here is whether lack of both innovation and investments as well as the pressure of international sanctions can be compensated by other factors like the drop in prices for older military equipment, generous loans, quick deliveries, support of special forces that comes together with the Russian military equipment, and the former reliable partnership that dates back to Soviet times. The article also debates the impact of global economic recession in 2020 and of the decline in prices to the production of military equipment in Russia. Since both the value of the Russian rouble and the size of the federal military budget are shrinking, numerous challenges lie ahead of the Russian military industry in the upcoming years.

Роль МБР в синдицированном кредитовании (Обзор доклада «Стоимость заимствований и роль многосторонних банков развития: случай трансграничного синдицированного банковского кредитования»)

The review covers the 2018 IMF working paper “Borrowing Costs and The Role of Multilateral Development Banks: Evidence from Cross-Border Syndicated Bank Lending.” It is acknowledged that cross-border bank lending is becoming an increasingly important source of external financing for developing countries and therefore can play a key role in infrastructure development. The working paper examines the impact of participation by multilateral development banks (MDBs) in loan syndicates on the terms of loan deals, with a particular emphasis on loan pricing. The results of the study show that MDB participation is associated with higher borrowing costs and longer maturities, indicating a greater willingness on the part of MDBs to finance projects with higher risks which may otherwise be unattractive to private investors. In addition, MDB participation is associated with lower spreads for riskier borrowers compared to similar loans from private banks. The authors show that MDBs can help mobilize private investment in developing countries, including in infrastructure, through risk mitigation.

Economic policy uncertainty and banks’ loan pricing

Using news-based government economic policy uncertainty (EPU) index of Baker et al. (2016) and bank-level data from 17 countries over the period 1998–2012, we find that government economic policy uncertainty has significant positive association with interest rates on bank gross loans. Specifically, a one standard deviation increase in EPU leads to 21.84 basis points increase in average interest rates on bank gross loans. We conjecture the economic policy uncertainty boosts banks’ loan prices by increasing the borrowers’ default risk. The impact of EPU on banks’ loan pricing remains persistent after controlling for banks’ own idiosyncratic default risk and the political risk variables from ICRG database. Results remain robust when we use general elections as an alternative proxy of government economic policy uncertainty. We also confirm main results with syndicated loan deals data and observe a significant positive association between loan spreads and EPU index. Together, our results suggest that government economic policy uncertainty is an economically important risk factor for banks’ loan pricing.

Limited loan rate differentiation, guanxi, loan size and loan maturity in the Chinese bank credit market

Since 2004, China has partially liberalized loan rate setting by the banks, but loan rates remain stubbornly within narrow bounds. We argue that competition in the loan market is signalled through the variation of loan deal terms and loan maturity rather than loan rates. We examine the determinants of loan deal conditions in terms of size and maturity. This paper focuses on the role of single firm-bank relationships in determining loan deal conditions as evidence of guanxi in Chinese banking market. Commercial loan deal terms of listed companies are matched to provider banks over the period 1999–2012 and sub-sample estimation for the pre-2004 and post-2004 periods confirm a change in the bank-firm-loan relationship. We find that single firm-bank relationships are associated with larger loan size and longer loan maturity in the pre-liberalization period but that this relationship has weakened in the liberalization period.

Loan purpose and accounting based debt covenants

PurposeThe purpose of this paper is to investigate the association between the purpose of a loan and the type of debt covenants, separated into balance sheet-based and income statement-based covenants.Design/methodology/approachUsing private loan deal observations obtained from the DealScan database over the period between 1996 and 2013, the authors classify the sample loan deals into three categories based on the purpose of borrowing, namely, borrowings for corporate daily operating purposes, financing purposes and acquisition and investing purposes. The authors conduct multinomial logistic regression analysis to test the relationship between the choice of financial ratios in a debt covenant and the purpose of a loan, controlling for financing constraints and other factors that have been identified as important to debt covenant analysis in prior studies.FindingsThe results provide evidence that the purpose of the loan is significantly associated with the type of debt covenants, suggesting that the lender and the borrower have considered the loan purpose when structuring their debt agreements. More specifically, the results indicate that the loans borrowed to fund acquisitions or long-term investment projects are more likely to have income statement-based covenants and less likely to have balance sheet-based covenants. In contrast, the loans borrowed for corporate daily operating purposes or financing purposes are more likely to contain balance sheet-based covenants relative to income statement-based covenants.Research limitations/implicationsThe authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency. The results are limited to the US market with its institutional structure. In future studies, it would be interesting to perform similar investigations on firms in other countries.Practical implicationsThe findings contain important and economically significant implications indicating that loan lenders and borrowers agree to include different types of accounting information (that is, income statement- versus balance sheet-based financial ratios) in their loan covenants for different purpose loans.Social implicationsOverall, the results provide important evidence regarding the connection between debt covenant structure and loan purpose. In doing so, it contributes to the literature on debt contract design (Dichev and Skinner 2002; Chava and Roberts 2008; Demerjian 2011; Christensen and Nikolaev 2012). Despite much interest in debt contract design, Skinner (2011) argues that there still exists incomplete knowledge of the economic factors that structure debt contracts. Income statement-based covenants depend on measures of profitability and efficiency and act as trip wires that transfer control rights to lenders when borrowing firms’ performance deteriorates. On the other hand, balance sheet-based covenants rely on information about sources and uses of capital and align interests between borrowing firms and lenders by restricting the borrower’s capital structure. The authors show that loan purpose is significantly associated with the choice between income statement-based and balance sheet-based covenants. This result further illustrates ways in which accounting information improves contracting efficiency.Originality/valueThis study is the first to identify differences in trends over time for the use of income statement- and balance sheet-based covenants as it relates to different loan purposes. The authors build on prior research to examine the degree to which loan purpose is associated with the choice between income statement-based and balance sheet-based covenants.

Enforcement of banking regulation and the cost of borrowing

Abstract We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997–2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that works over and above the lower risk of punished banks post-enforcement and survives in a number of sensitivity tests. We also find that this effect persists for approximately four years post-enforcement.

The Influence of Loan Officers on Loan Contract Design and Performance

We investigate the extent to which loan officers generate independent, individual effects on the design and performance of syndicated loans. We construct a large database containing the identities of loan officers involved in structuring syndicated loan deals, allowing us to systematically disentangle borrower, bank, and loan officer fixed effects. We find that loan officers have significant influence on interest spreads, loan covenant design, and loan performance. Inclusion of borrower fixed effects increases our power to rule out the alternative that loan officer fixed effects reflect the matching of officers to borrowers based on time-invariant borrower characteristics. We document heterogeneity in loan officers’ influence across loan contract terms, with loan officers exerting stronger influence over covenant package design than over interest spreads, but marginal influence on loan maturity. Lead officers have greater influence than participant officers over covenant package design and loan performance, but less robust differential influence on interest spreads.

Borrowing Costs and The Role of Multilateral Development Banks

Cross-border bank lending is a growing source of external finance in developing countries and could play a key role for infrastructure financing. This paper looks at the role of multilateral development banks (MDBs) on the terms of syndicated loan deals, focusing on loan pricing. The results show that MDBs' participation is associated with higher borrowing costs and longer maturities---signaling a greater willingness to finance high risk projects which may not be financed by the private sector---but it is also associated with lower spreads for riskier borrowers. Overall, our findings suggest that MDBs could crowd in private investment in developing countries through risk mitigation.

Enforcement of Banking Regulation and the Cost of Borrowing

We show that borrowing firms benefit substantially from important enforcement actions issued on U.S. banks for safety and soundness reasons. Using hand-collected data on such actions from the main three U.S. regulators and syndicated loan deals over the years 1997-2014, we find that enforcement actions decrease the total cost of borrowing by approximately 22 basis points (or $4.6 million interest for the average loan). We attribute our finding to a competition-reputation effect that forces banks to lower their cost of credit, irrespective of other changes in their business models after the enforcement action.

Plug Power loan deal with NY Green Bank to boost fuel cell use

In the US, Plug Power in upstate New York has closed a $25 million senior loan facility agreement with NY Green Bank, to support the deployment of 1300 fuel cell systems in New York over the next three years at distribution centres for clients such as Walmart and Home Depot.

Bank versus nonbank financial institution lending behaviour: indictors of firm size, risk or ownership?

ABSTRACTUsing 1251 matched commercial loan deal terms of listed companies over the period 2003–2014, we examine the heterogeneity of lending behaviours of bank and nonbank financial institutions. The results show that large firms have a higher likelihood of getting loans from nonbank financial institutions. Compared to banks, nonbank financial institutions are more likely to provide credit help to high operation risk firms. State-owned listed firms have a higher probability to get finance from nonbank financial institutions than private firms, which highlights the situation that private firms are in a weak position to get credit help from China’s financial system. Moreover, the process of increasing the banks’ noninterest income ratio tends to drives firms to borrow from nonbank financial institutions.