Debtrenegotiation and the design of financialcontracts

Christophe J. GodlewskiUHA & EM Strasbourg

French Finance Association International Conference 2016

M otivations I

• Role of the design of credit contracts for firm s

investm ent, operating, financial policies...

• M ajor advantage of corporate financing = flexibility of

financial contracts

• Growing em pirical literature on private debt contracts

renegotiation

• Lim ited knowledge on how renegotiation affects the

design of credit contracts

• Allocation of contractual control and decision rights

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

M otivations II

Amount Covenants FinancialCovenants Non Financial DefinitionMaturity Pricing

Am ended loan characteristics

010

2030

40pe

rcen

t1 2 3 4 5 6

Renegotiation package

Num ber of distinct am ended contract characteristics

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

W hati do...

• How renegotiation shapes the design of the credit

contract?

• W hat are the determ inants of the renegotiation package?

• Y = com position of the renegotiation package (i.e.

num ber of different am ended loan characteristics)

• X = loan, syndicate, borrower, lenders, legal variables

• 1,500 loans between 1999 and 2014 in Europe

• Europe: bank based financial system + legal environm ent

less protective of creditors

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

Literature I

• Theory is rich

• Ex post inefficiency of the initial contract + occurrence of

unanticipated or non-contractible states lead contracting parties to

be unable or unwilling to com m it to the initial term s

• Contracting frictions (initial contract design + adverse ex ante

incentives) lead to debt renegotiation (Hart & M oore)

• Contractual allocation of control and decisions rights (e.g. Dessein

2005; Garleanu & Zwiebel2009)

• Bargaining power and the dynam ics of debt renegotiation (M oraux

& Silaghi2014; Hege& M ella-Barral2005)

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

Literature II

• Em pirical literature is growing (Denis & W ang 2014; Godlewski

2014, 2015; Nikolaev 2015; Roberts & Sufi 2009; Roberts 2015)

• Renegotiations are frequent, early, significant m odifications of

initial contracts

• Firm post-renegotiation perform ance

• Significant positive AR around renegotiation

• New inform ation, econom ic conditions, contractual assignm ent of

bargaining power, financial conditions...

• Renegotiation helps com pleting credit contracts and shapes

borrower-lender relationships

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

Em piricaldesign

• M ulti-sources data (see appendix B for definitions)

• Bloom berg: loans, am endm ents, syndicates

• Factset: borrowers

• Orbis: lenders

• Djankov et al. (2007) + Favara et al. (2012): legal environm ents

• Final sam ple = 1,455 com panies; 1,508 am ended loans; 84 loan

agents

• Tim e span is 1.1.1999 31.12.2014 & 32 European countries

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

Results figures I

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

1 2 3

4 5 6

Amount Covenants FinancialCovenants Non Financial DefinitionMaturity Pricing

Graphs by Amendments (Q)

Am ended loan characteristics by renegotiation package (1 6: 1 am ended term entire contract am ended) and by renegotiation round (1 5+: 1 renegotiation 5 or m ore renegotiations over tim e)

Results figures II

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

05

1015

20pe

rcen

t

0000

0100

0010

0000

1100

0100

0001

1000

0111

0010

0000

1001

0010

1000

1011

0011

0000

1101

0011

1000

1111

0100

0001

0001

0100

1001

0011

0101

0001

0101

0101

1001

1000

0110

0101

1010

0110

1101

1100

0111

0101

1110

0111

1110

0000

1000

0110

0010

1000

1110

0100

1001

1010

0111

1010

0010

1001

1010

1010

1011

1011

0110

1110

1011

1111

0000

1100

0111

0010

1100

1111

0101

1101

1011

0111

1110

0011

1001

1110

1011

1011

1111

0011

1110

1111

11

Renegotiation packages in details: 1: am ended, 0 otherwise;order is M aturity, Definition, Financial covenants, Non-financial covenants, Pricing, Am ount; (e.g. 100001 : m aturity and am ount are am ended in 14% of the cases)

Results descriptives stat.

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Table 2 Descriptive statistics (averages here)

• Large loans (1.5 bln $), long m aturity (7 years), spread of 273 bps, 1 out

of 5 secured, half have covenants

• Large syndicates (15 m em bers), low concentration index of retained shares

(0.04), 1 out of 5 has a top 3 league table agent, 1 out of 5 at least 1

m em ber from sam e country as borrower

• Loan has 2 renegotiation rounds, 2 years & 8 m onths duration b/w rounds

• 65% firm s are listed, large (7 bln $ sales), debt / assets: 35% , RoA: 2%

• Large agents (1.5 trln $), 39% loans, equity ratio: 3% , RoE: 9%

• See table 3 for statistics by renegotiation package (1 6 am ended loan

term s)

Results regressionsI

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Ordered logitregressionswith s.e.clustered at loan, borroweror lender

level

• Y = com position of the renegotiation package (i.e. num ber of different

am ended loan characteristics: 1 -6)

• Controls: m ain loan currencies (USD and GBP), loan type (revolving), loan

purposes (acquisition, general corporate, LBO, debt refinancing, working

capital), loan am endm ent year, borrower industry sector and country

• Table 4: Loan and syndicate determ inants (significant)

Variables Coef.

M aturity 0.17 : 0.23

Secured -0.38 : -57

League -0.60 : -0.64

Results regressionsII

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Table 5: Loan, syndicate and legal environm ent determ inants

• M aturity, Secured, League consistent

Variables Coef.

Creditorrights 0.17 : 0.26

French 0.86 : 1.24

Priority 0.83

Cred. Recov. rate 2.27

• Table 6: Loan, syndicate and borrower determ inants

• Secured, League n.s. / Concentration neg. / Relationship pos.

• Sales neg. (Debt / Assets & RoA n.s.)

Results regressionsIII + robustnesschecksI

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Table 7: Loan, syndicate and lender (agent) determ inants

• M aturity, Secured, League consistent

Variables Coef.

Net int. M argin 45.67

Efficiency -2.45

Loans/ Assets -2.89

• Table 8: Full specifications during Financial Crisis

• M aturity & Concentration pos.

• Creditor rights pos. & Priority & Creditors recovery rate pos.

• Table 9: Full specifications during Eurozone Crisis

• M aturity & Relationship pos. / Covenants neg. / Legal X ibid.

Results robustnesschecksII

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Table 10: Loan & syndicate frictions

• No borrower & lender variables (sam ple size)

Variables Short m aturity Not secured No league

M aturity + + +

Concentration + n.s. n.s.

Legalenv. + + +

• Table 11: Borrower country effects

• Excluding DE, FR, GB, NL

• No borrower & lender variables (sam ple size)

• M aturity & legal environm ent survives

Discussion

M otivations

W hat I do

Literature

Em pirical

design

Results

Discussion

• Contribution to growing em pirical literature on private debt contracts

renegotiation

• Determ inants of bank loan contract design following renegotiation in

Europe

• Contractual frictions m atter (m aturity, collateral + lead bank reputation)

• Legal environm ent m atters (m ore friendly & less renegotiation frictions

lead to larger concessions & deeper reshaping of the contract)

• Lender financial conditions m atter (sound & profitable banks accept

larger concessions)

• Econom ic significance: each variable s.d.increase translates into 0.15 to

0.3 s.d.changes of renegotiation package