Conference Agenda

Session
CF 05: Corporate Lending
Time:
Thursday, 17/Aug/2023:
10:30am - 12:00pm

Session Chair: Tim Eisert, Erasmus University Rotterdam
Location: 4A-33 (floor 4)


Presentations
ID: 1720

Movables as Collateral and Corporate Credit: Loan-Level Evidence from Legal Reforms across Europe

Steven Ongena1, Walid Saffar2, Yuan Sun2, Lai Wei3

1University of Zürich, Swiss Finance Institute, KU Leuven, NTNU Business School, and CEPR; 2Hong Kong Polytechnic University; 3Lingnan University

Discussant: Adam Winegar (BI Norwegian Business School)

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.

EFA2023_1720_CF 05_1_Movables as Collateral and Corporate Credit.pdf


ID: 2101

Corporate leverage ratio adjustment under cash flow-based debt covenants

Alexander Becker, Ivan Julio, Irena Vodenska, Liyuan Wang

Boston University, United States of America

Discussant: Tetiana Davydiuk (Carnegie Mellon University)

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.

EFA2023_2101_CF 05_2_Corporate leverage ratio adjustment under cash flow-based debt covenants.pdf


ID: 840

Ownership Concentration and Performance of Deteriorating Syndicated Loans

Mariassunta Giannetti2, Ralf Meisenzahl1

1Federal Reserve Bank of Chicago, United States of America; 2Stockholm School of Economics, CEPR and ECGI

Discussant: Daniel Streitz (IWH Halle)

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.

EFA2023_840_CF 05_3_Ownership Concentration and Performance of Deteriorating Syndicated Loans.pdf