initial conditions and the private debt renegotiation process
TRANSCRIPT
Initial conditions and the private debtrenegotiation processChristophe J. Godlewski
UHA & EM Strasbourg, LaRGE Research Center[contact: [email protected]]
AFFI 2017 Conference, Valence
What I do• Whether & how initial conditions (around loan origination)
influence (private debt) renegotiation Exploratory study
• Empirical testing of incomplete contract theory + puzzling results regarding initial contract terms How to write better contracts
• Renegotiation likelihood, dynamics (rounds), degree / scope (terms) using sequential logit
• Variables: loan, banking pool, borrower and lender, country • 15k European loans (8k firms from 29 countries) from 1999 to
2015
What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
Why I do itWhat I do
Why I do it
What do we know
How I do it
What do I find
Discussion
• Renegotiation = mechanism for revising the initial contract (in case of contingencies) to restore efficiency
• Initial conditions should play an important role• Theoretical literature is rich / Empirical results emerging / Mixed
- puzzling• Roberts & Sufi (2009) : no significant impact• Nikolaev (2016), Saavedra (2015), Paligorova & Santos (2016):
significant impact• Writing better contracts => design, corporate policy,
performance, financial intermediation, economy !• Europe = bank-based financial system
What do we know (theory)• Incomplete contracts & financial contracting (Hart; Hart &
Moore)
• Unanticipated or non-contractible events => ex-post inefficiency of initial contract => renegotiation
• Renegotiation = (optimal?) decision-making mechanism in advance (initial contract) of contingencies / arrival of new information Allows to contract on unverifiable information
• Contract allocates control & bargaining power => sharing initial and subsequent surplus / incentives
• Also strategic considerations (signaling, opportunism,
What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
What do we know (empirical)• Growing literature (Godlewski 2014, 2015; Nikolaev 2015; Roberts & Sufi
2009; Roberts 2015), mostly on US• Renegotiations are frequent, early, with significant modifications of
initial contracts• Significant & positive AR around renegotiation• New information, economic conditions, contractual assignment of
bargaining power, financial conditions... Contracting frictions, agency / information problems…
• Renegotiation helps completing credit contracts and (re)shaping borrower-lender relationships
• However puzzling results regarding initial conditions
What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
How i do it (data & method)• Multi-sources data (see section 3.1)• Bloomberg (BPTS): loans, amendments, syndicates + borrowers• Orbis (BvD): lenders (lead)• GFDD-WB (Demirgüç-Kunt et al., 2012) + Djankov et al. (2007) +
Favara et al. (2012): country environment (economic, financial, legal)
• Sample = 8,691 companies; 15,781 loans• Time span is 1.1.1999 – 31.12.2015 & 29 European countries• Renegotiation process = decision | dynamics (rounds) / degree
(amended terms)• Comprehensive approach => sequential logit model
What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
How i do it (big picture)What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
What do I find (figures I)What I do
Why I do it
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How I do it
What do I find
Discussion
020
4060
80
perc
ent
1 2 3 4 5 6 7 8 9
Rounds
010
2030
4050
perc
ent
1 2 3 4 5 6
Amendments
Figure 5 Renegotiation dynamics and scope
What do I find (figures II)What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
32.72%
7.992%
4.268%24.82%
21.26%
8.935%
36.64%
6.301%2.192%22.1%
23.95%
8.813%
Unique_Round
23.56%
11.94%
9.115%31.18%
14.98%
9.222%
Multiple_Rounds
38.71%
6.564%.6422%25.15%
23.62%
5.316%
Single_Amendment
27.86%
9.151%
7.211%24.56%
19.35%
11.87%
Several_Amendments
Amount Covenants Financial
Covenants Non Financial Definition
Maturity Pricing
Figure 4 Amended terms
What do I find (stat. desc.)What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
Loan & Lenders pool MeanFirm Mean Lender (lead) Mean Country (borrower) Mean
Amount 1 861.15Listed 0.47Lender rated 0.16Renegotiationfailure 0.39
Maturity 6.41Borrower rated 0.12Total assets 1 200.00 Priority 3.33
Covenants 0.09Sales 4 835.52Book value 0.39Creditors recover 0.61
Secured 0.40Debt / Equity 1.40TCE ratio 0.04Private credit 113.53
Amount outstanding 4.73Current ratio 0.01LLR / Loans 0.02Domestic private debt 33.16
Previous issues 3.80Operating margin 0.11RoE 0.10International
private debt 64.23
Lenders pool Loans / Assets 0.41Stock market 86.87
Lenders 9.24 Volatility of stock 20.26
League 0.19 Bank concentration 78.04
Relationship 0.12 Foreign banks 118.82Same country 0.28 Bank Z score 11.41
What do I find (regressions I)What I do
Why I do it
What do we know
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What do I find
Discussion
(loan & lenderspool variables) Reneg. Rounds Amend.
Amount (log) 0.1610*** 0.0083 0.0018
Maturity 0.0653*** 0.0362 0.0299
Covenants 1.5372*** 0.8301*** 0.5870**
Secured 0.6834*** 0.6569*** 0.0325Amount outstanding (log) -0.2039*** 0.0935 -0.0905
Previous issues 0.0542** -0.0270 0.0214
Lenders 0.0448*** 0.0179** 0.0061
League 0.3681*** 0.1649 -0.2447
Relationship -0.3523** 0.6307*** 0.2025
Listed 0.6593*** -0.0617 -0.2296
Borrower rated 0.2494 0.4683** 0.5353**
All regressions include control variables for:- main loan currencies
(USD and GBP)- loan type (term)- loan purposes
(acquisition, general corporate, LBO, project finance, debt refinancing, working capital)
- Year- borrower industry sector- country
Showing significant variables only(and skipping robust s.e.clustered at loan level)
What do I find (regressions II)What I do
Why I do it
What do we know
How I do it
What do I find
Discussion
(lead lendervariables) Reneg. Rounds Amend.
TCE ratio 13.5743** 31.8057***24.6119**
*
LLR / Loans -3.0478 -5.6084 24.2640**
Loans / Assets -1.7495*** -1.6181 -1.8857*
(country variables) Reneg. Rounds Amend.Renegotiation failure -1.3675*** -0.6135 0.3420Priority 0.1794 0.5016** 0.0825Creditors recovery 0.9792*** -0.2597 0.3952Private credit -0.0084*** -0.0035 -0.0053International privatedebt 0.0110*** 0.0096** 0.0064Stock market 0.0050** 0.0014 0.0027Bank concentration 0.0116** 0.0083 0.0021Foreign banks 0.0011*** -0.0002 0.0010*
In addition:Loan & lenders pool + listed & ratings variables included
Borrower variables never significant
Country variables included separately:- Legal environment- Financial development- Banking structure
What do I find (robustness)What I do
Why I do it
What do we know
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What do I find
Discussion
• Alternative RHS variables : loan spread, syndicate concentration, reputation, relationship, borrower, lender, country variables
• Specific contractual features (frictions): no covenants, no collateral, no term loans, small syndicates, no relationship, no rating
• Maturity effect: dropping loans maturing in 2013 / after 2015
• Time: credit & EZ crises• Place (economic areas): EZ area only / dropping UK
Discussion• Important economic role of initial conditions for the renegotiation
process• Contractual mechanisms (covenants and collateral) which mitigate
adverse selection and moral hazard have the largest positive economic impacts
• Organizational mechanisms (lenders pool size, reputation, relationship
• Soundness and credit portfolio management quality of the lenders• Institutional protection of creditors protection is the most
economically significant determinant of the renegotiation process• Survive several robustness checks
What I do
Why I do it
What do we know
How I do it
What do I find
Discussion