Does pledging movables as collateral alter corporate borrowing? To answer this question, we study the effect of collateral law reforms on syndicated bank loans granted across nine European countries that facilitated pledging movables between 1995 and 2019, comparing them to nineteen countries that did not. We find that although the reforms have enabled firms to issue more secured loans, the average cost of the loans and the number of covenants has also increased. Banks may demand more to compensate for both the potential wealth redistribution induced by newly issued secured credit and the extra monitoring involved to mitigate concerns about using movables as collateral.

We find that debt covenants have an asymmetric effect on capital structure adjustments of over- and underleveraged firms. While the literature suggests that the presence of covenants imposes a financial cost to all firms, we find that their impact is more nuanced. Introducing a novel measure for covenant tightness, we show that overleveraged firms with tight covenants indeed are slowed down in their adjustment towards their target capital structure. However, this effect is negligible for loose covenants. Conversely, underleveraged firms generally appear to slow down their adjustment in the presence of debt covenants. However, if they get sufficiently close to violation, the covenant has a discipling effect and incentivizes the firms towards a faster adjustment towards the target. Our results are robust across time periods and hold for different definitions of leverage ratios.

Banks are widely believed to have an information advantage, but regulation forces them to sell deteriorating loans, potentially hampering renegotiation and amplifying the initial negative shock to the borrower. We study to what extent the secondary market affects loan outcomes after an initial shock to credit quality. We show that banks, together with CLOs, sell downgraded loans to unregulated financial institutions. The reallocation of loan shares favors the syndicate's concentration, increases lenders' incentives to renegotiate and substitutes lenders' specialization. However, during periods of generalized distress, when potential buyers experience financial constraints, the secondary market fails to reallocate loan shares and syndicate ownership remains dispersed. We show that subsequently loans are less likely to be amended and more likely to be downgraded even further.