Loan Renegotiation Research Articles

Bank loan renegotiation and financial institutions' network

We investigate how lender's capacity of sourcing information about a borrower, proxied by its centrality in the networks of syndicated lending, influences the process of bank loan renegotiation. Using a large sample of more than 6000 loans issued in 25 European countries we find that the presence of network-central and better-informed lenders in a syndicate has a significant impact on the renegotiation process, increasing the likelihood of renegotiation, the number of renegotiation rounds, and the number of amendments to the loan agreement. Our findings survive numerous robustness checks and confirm that access to superior information encourages private debt renegotiation.

Developers’ leverage, capital market financing, and fire sale externalities✰

Leveraged developers facing rollover risk are more likely to engage in fire sales. Using COVID-19 as a natural experiment, we find evidence of fire sale externalities in the Thai condominium market. Specifically, properties resold by developers with higher leverage ratios are listed at lower prices. This trend is evident for listed developers, who have access to capital market financing, but not for unlisted developers, who primarily rely on bank financing. We attribute this difference to the flexibility offered by bank loan renegotiation as opposed to the rigidity of debt capital market repayments. This observation highlights the pivotal role of commercial banks in financial intermediation, especially in the presence of information asymmetry.

Language and private debt renegotiation

AbstractWe study how language affects private debt renegotiation. We predict that stronger future time reference (FTR) languages alter the importance of renegotiation risk by lowering the perceived value of loan renegotiation. We test this hypothesis on a sample of 6500 loans issued to European firms between 1999 and 2017. We find that the use of a stronger FTR language decreases the likelihood of renegotiation and the number of renegotiation rounds. These findings are robust to several FTR proxies, various specifications including loan, borrower, and country‐level variables, and potential mitigation effects from specific loan, country, or time effects. They suggest that linguistic structure influences the renegotiation process of private debt contracts.

Private Equity and Debt Contract Enforcement: Evidence from Covenant Violations

Using the Shared National Credit supervisory data, we find Private Equity (PE) sponsored firms violate loan covenants more often than comparable non-PE firms. However, upon covenant violation, PE-sponsored borrowers experience relatively smaller reductions in credit commitments, suggesting lenders are more lenient with these borrowers. This limited-punishment effect exists in both covenant-heavy and covenant-lite loans but is stronger for banks with relatively higher capital. Limited punishment is driven by repeated deals and sponsor reputation, as well as the higher bargaining power of sponsors in loan renegotiation. Our results indicate sponsors generate financial flexibility by dampening debt contract enforcement for distressed borrowers.

The agency costs of tranching: Evidence from RMBS

This paper documents the agency costs resulting from the deeper tranching of subprime residential mortgage pools. Mortgage servicers are less likely to renegotiate delinquent loans collateralizing a greater number and variety of tranches. We find that an interquartile increase in tranching reduces mortgage servicers’ probability of loan renegotiation by 14% relative to the mean. This effect is concentrated in mortgages with greater ambiguity surrounding the loan value maximizing action. Overall, our results support the notion that tranching worsens agency frictions by increasing coordination costs among investors and impeding their monitoring of the agent.

Lender Coordination and Loan Renegotiation

Lender Coordination and Loan Renegotiation

Loan renegotiation and the long-term impact on total factor productivity

When a loan is close to becoming non-performing, banks have stronger incentives to renegotiate it in favourable conditions for the borrower (loan forbearance) rather than for recognising and resolving the non-performing loan. At the aggregated level and looking at borrowers (non-financial corporations), the preference for loan renegotiation may affect total factor productivity and aggregate productivity growth, as new entrants, typically using technologies that are more advanced, may be crowded out from bank funding by incumbent non-financial corporations (this would particularly be the case in the absence of well-developed financial markets). The empirical analysis finds that a wider use of loan renegotiation, seen through lower values of provisions to total loans, has a negative effect on the change of total factor productivity (in addition to the influence of consumption growth). These results provide useful insights when considering the resolution of non-performing loans and the long-term consequences on the real economy.

Private debt renegotiation, corporate policies, and performance: empirical evidence from Europe

ABSTRACT We investigate the effects of private debt renegotiation on a firm’s performance and financial and investment policies. We employ endogenous switching regressions using a large cross-country sample of loans issued and amended over a long-term in Europe. We find that bank loan renegotiation has an economically significant and causal impact on financial policy and performance. Renegotiation offers firm added degrees of freedom and unlocks its economic potential, implying significant effects of the firm’s tangibility, growth, opportunities, and cash on financial policy and performance. Bank loan renegotiation also shows a certification and signalling effect, which can increase the effect of amendments to the credit agreement on a firm’s financial policy.

The CDS market reaction to loan renegotiation announcements

This paper investigates the impact of loan renegotiations on firms’ credit risk using the CDS market as a measure of credit risk. Using a sample of public US firms for 2010–2017, we document a significant decrease in CDS spreads and returns that we interpret as evidence of a certification effect. The finding suggests that the loan renegotiations are on average beneficial for the firm. The strongest reactions are for material amendments such as line of credit amount or tranche amount. Additionally, we find negative stock market returns, although barely statistically significant. Moreover, we identify an anticipation effect of up to 30 days before the announcement date on the CDS market, possibly due to informed trading by CDS banks of their speculative-rated borrowers’ CDS contracts. Finally, we show that firm-specific CDS returns lead idiosyncratic stock returns, especially around the announcement date and for speculative-rated firms.

Loan Renegotiation and the Long-term Impact on Total Factor Productivity

Loan Renegotiation and the Long-term Impact on Total Factor Productivity

Voluntary Bank Debt Renegotiation and Bondholders' Wealth

I utilize bondholder wealth and corporate investment e ffects to test theories of why voluntary bank debt renegotiation happens without any default. Bondholders react positively to renegotiations that relax loan covenants, consistent with Gârleanu and Zwiebel (2009) that lenders transfer control rights back to the firm upon receiving favorable credit information. Positive bondholder reaction also rejects the alternative hypothesis that relaxing covenants signals weakened bank monitoring. Bondholders do not have a negative reaction to the renegotiated loan spread increase. Firms also invest more conservatively after such renegotiations. These results fail to support Gorton and Kahn (2000) that increased loan spread signals that asset substitution cannot be avoided. Lastly, I find that debt overhang is reduced following loan renegotiations that relax covenants.

Relationship and Transactional Lending with Delegated Monitoring and Regulatory Constraints

We develop a theory that rationalizes syndicated loans with (1) a relationship lender who lends to the firm repeatedly over time and monitors the firm, (2) transactional lenders who lend to the firm infrequently and do not monitor, and (3) frequent loan renegotiations. Transactional lenders are biased toward liquidation, whereas relationship lenders are biased toward continuation. By borrowing simultaneously from both types of lenders, the firm generates disagreement between them. This disagreement induces costly renegotiation upon default, which can increase monitoring incentives and thereby reduce the firm's cost of credit.

Lending Relationships in Loan Renegotiation: Evidence from Corporate Loans

This paper presents evidence that personal relationships between corporate borrowers and bank loan officers improve the outcomes of loan renegotiation. Analysing a bank reorganization in Greece in the mid-2010s, I find that firms that experience an exogenous interruption in their loan officer relationship confront three consequences: one, the firms are less likely to renegotiate their loans; two, conditional on renegotiation, the firms are given tougher loan terms; and three, the firms are more likely to alter their capital structure. These results point to the importance of lending relationships in mitigating the cost of distress for borrowers in loan renegotiations. JEL Classification: G21, L14, E44, E58, O16

Bank loan renegotiation and credit default swaps

Using Roberts (2015) loan-level data from 2000 to 2011, we find that the inception of CDS trading on reference firms’ debt is associated with a decreased number and lower probability of amendments, restatements, and rollovers to existing lenders of bank loans. Reference firms are also less likely to terminate loans prematurely or refinance with different lenders after the inception of CDS trading and tend to exhibit longer loan maturities. Our evidence is consistent with the empty creditor problem arising from CDS trading and the resulting decrease in the negotiation power of borrowers. Our research contributes to understanding how financial innovations alter bank-lending relationships.

Bank monitoring: Evidence from syndicated loans

We directly measure banks’ monitoring of syndicated loans. Banks typically demand borrower information on at least a monthly basis. About 20% of loans involve active monitoring (i.e., site visits or third-party appraisals). Monitoring increases with the lead bank’s incentives and the value of information and is negatively associated with loan spreads and maturity. The monitoring captured by our measures can either complement or substitute for covenant-based monitoring, depending on whether the monitoring informs covenant compliance. Banks increase monitoring following deteriorations in borrower financial condition and credit line drawdowns. Finally, monitoring is positively related to future covenant violations and loan renegotiations.

The CDS Market Reaction to Loan Renegotiation Announcements

This paper analyzes the credit market's reaction to loan renegotiation announcements through changes in credit default swap (CDS) spreads. Using a sample of public US firms during the period 2010-2017, we document a positive and significant CDS market reaction (decrease in CDS spreads). The strongest reactions are for material amendments such as line of credit amount or tranche amount. On the contrary, we find no significant stock market reaction. Moreover, we identify an anticipation effect of up to 30 days before the announcement date on the CDS market. Finally, we show that firm-specific CDS returns lead the idiosyncratic component of stock returns especially around the announcement date and for speculative-rated firms.

Institutional investors and loan dynamics: Evidence from loan renegotiations

We examine the probability of exit for different types of investors in the syndicated loan market, as well as how the entry and exit of different types of investors is associated with changes in loan characteristics. Nonbanks, particularly CLOs, closed-end funds, and mutual funds, are more likely than bank lenders to exit the syndicate rather than to participate in the renegotiated loan. For mutual funds, greater net fund outflows imply a greater likelihood of exit, and this finding is consistent with nonbank lending creating greater systemic risk (Stein 2013). For most nonbanks, the likelihood of an exit increases if the financial condition of the borrower improves and the potential for higher spreads wanes. Controlling for borrower risk, the addition of most nonbank institutions, in contrast to banks, is accompanied by an increase in loan spreads, but no significant increase in the number or tightness of covenants.

Lending Relationships in Loan Renegotiation: Evidence from Corporate Loans

This paper presents evidence that personal relationships between corporate borrowers and bank loan officers improve the outcomes of loan renegotiation. Analysing a bank reorganization in Greece in the mid-2010s, I find that firms that experience an exogenous interruption in their loan officer relationship confront three consequences: one, the firms are less likely to renegotiate their loans; two, conditional on renegotiation, the firms are given tougher loan terms; and three, the firms are more likely to alter their capital structure. These results point to the importance of lending relationships in mitigating the cost of distress for borrowers in loan renegotiations.

Debt Relief and Slow Recovery: A Decade after Lehman

We follow a representative panel of millions of consumers in the U.S. from 2007 to 2017 and document several facts on the long-term effects of the Great Recession. There were about six million foreclosures in the ten-year period after Lehman’s collapse. Owners of multiple homes accounted for 25% of these foreclosures, while comprising only 13% of the market. Foreclosures displaced homeowners, with most of them moving at least once. Only a quarter of foreclosed households regained homeownership, taking an average four years to do so. Despite massive stimulus and debt relief policies, recovery was slow and varied dramatically across regions. House prices, consumption and unemployment remain below pre-crisis levels in about half of the zip codes in the U.S. Regions that recovered to pre-crisis levels took on average four to five years from the depths of the Great Recession. Regional variation in the extent and speed of recovery is strongly related to frictions affecting the pass-through of lower interest rates and debt relief to households including mortgage contract rigidity, refinancing constraints, and the organizational capacity of intermediaries to conduct loan renegotiations. A simple counterfactual based on our estimates suggest that, regardless of the narratives of the causes of housing boom and bust, alleviating these frictions could have reduced the relative foreclosure rate by more than half and resulted in up to twice as fast recovery of house prices, consumption, and employment. Our findings have implications for mortgage market design, monetary policy pass-through, and macro-prudential and housing policy interventions. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

The Importance of Originator-Servicer Affiliation in Loan Renegotiation

This paper presents evidence that affiliation between the mortgage servicer and the originator provides a mechanism to reduce information frictions inherent in debt renegotiation. We find that originator-servicer affiliation increases the likelihood of modification by 10–23% using a large sample of delinquent securitized non-agency mortgages. Post-modification, affiliated loans are also 7.3% more likely to not return to severe delinquency within 12 months. Further examination reveals that affiliation affords servicers lower-cost access to borrower and loan information, thus improving their ability to implement effective debt restructuring strategies. In the absence of standardized information transmission between originators and servicers, information critical for debt renegotiation will be lost as banks disintegrate origination and servicing.