Debt renegotiation and the design of financial contracts

1. Debtrenegotiation and the design
offinancialcontracts
Christophe J.Godlewski
UHA & EM Strasbourg
French Finance Association InternationalConference 2016

2. M otivations I
• Role ofthe design ofcreditcontractsforfirm s
investm ent,operating,financialpolicies...
• M ajoradvantage ofcorporate financing = flexibility of
financialcontracts
• Growing em piricalliterature on private debtcontracts
renegotiation
• Lim ited knowledge on how renegotiation affectsthe
design ofcreditcontracts
• Allocation ofcontractualcontroland decision rights
M otivations
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3. M otivations II
Amount Covenants Financial
Covenants Non Financial Definition
Maturity Pricing
Am ended loan characteristics
010203040
percent
1 2 3 4 5 6
Renegotiation package
Num berofdistinctam ended contract
characteristics
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4. W hat ido...
• How renegotiation shapesthe design ofthe credit
contract?
• W hatare the determ inantsofthe renegotiation package?
• Y = com position ofthe renegotiation package (i.e.
num berofdifferentam ended loan characteristics)
• X = loan,syndicate,borrower,lenders,legalvariables
• 1,500 loansbetween 1999 and 2014 in Europe
• Europe:bank based financialsystem + legalenvironm ent
lessprotective ofcreditors
M otivations
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Discussion

5. Literature I
• Theory isrich
• Ex postinefficiency ofthe initialcontract+ occurrence of
unanticipated ornon-contractible stateslead contracting partiesto
be unable orunwilling to com m itto the initialterm s
• Contracting frictions(initialcontractdesign + adverse ex ante
incentives)lead to debtrenegotiation (Hart& M oore)
• Contractualallocation ofcontroland decisionsrights(e.g.Dessein
2005;Garleanu & Zwiebel2009)
• Bargaining powerand the dynam icsofdebtrenegotiation (M oraux
& Silaghi2014;Hege & M ella-Barral2005)
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6. Literature II
• Em piricalliterature isgrowing (Denis& W ang 2014;Godlewski
2014,2015;Nikolaev 2015;Roberts& Sufi2009;Roberts2015)
• Renegotiationsare frequent,early,significantm odificationsof
initialcontracts
• Firm post-renegotiation perform ance
• Significantpositive AR around renegotiation
• New inform ation,econom ic conditions,contractualassignm entof
bargaining power,financialconditions...
• Renegotiation helpscom pleting creditcontractsand shapes
borrower-lenderrelationships
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7. Em piricaldesign
• M ulti-sourcesdata (see appendix B fordefinitions)
• Bloom berg:loans,am endm ents,syndicates
• Factset:borrowers
• Orbis:lenders
• Djankov etal.(2007)+ Favara etal.(2012):legalenvironm ents
• Finalsam ple = 1,455 com panies;1,508 am ended loans;84 loan
agents
• Tim e span is1.1.1999 31.12.2014 & 32 European countries
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8. Results figures I
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1 2 3
4 5 6
Amount Covenants Financial
Covenants Non Financial Definition
Maturity Pricing
Graphs by Amendments (Q)
Am ended loan characteristicsby renegotiation package (1 6:1 am ended term
entire contractam ended)and by renegotiation round (1 5+ :1 renegotiation 5 or
m ore renegotiationsovertim e)

9. Results figures II
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05101520
percent
000001
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Renegotiation packagesin details:1:am ended,0 otherwise;orderisM aturity,
Definition,Financialcovenants,Non-financialcovenants,Pricing,Am ount;(e.g.
100001 :m aturity and am ountare am ended in 14% ofthe cases)

10. Results descriptives stat.
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• Table 2 Descriptive statistics(averageshere)
• Large loans(1.5 bln $),long m aturity (7 years),spread of273 bps,1 out
of5 secured,halfhave covenants
• Large syndicates(15 m em bers),low concentration index ofretained shares
(0.04),1 outof5 hasa top 3 league table agent,1 outof5 atleast1
m em berfrom sam e country asborrower
• Loan has2 renegotiation rounds,2 years& 8 m onthsduration b/w rounds
• 65% firm sare 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 forstatisticsby renegotiation package (1 6 am ended loan
term s)

11. Results regressions I
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• Ordered logitregressionswith s.e.clustered atloan,borrowerorlender
level
• Y = com position ofthe renegotiation package (i.e.num berofdifferent
am ended loan characteristics:1 -6)
• Controls:m ain loan currencies(USD and GBP),loan type (revolving),loan
purposes(acquisition,generalcorporate,LBO,debtrefinancing,working
capital),loan am endm entyear,borrowerindustry sectorand 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

12. Results regressions II
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• Table 5:Loan,syndicate and legalenvironm entdeterm 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 borrowerdeterm inants
• Secured,League n.s./ Concentration neg./ Relationship pos.
• Salesneg.(Debt/ Assets& RoA n.s.)

13. Results regressions III+ robustness checks I
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• Table 7:Loan,syndicate and lender(agent)determ inants
• M aturity,Secured,League consistent
Variables Coef.
Netint.M argin 45.67
Efficiency -2.45
Loans/ Assets -2.89
• Table 8:Fullspecificationsduring FinancialCrisis
• M aturity & Concentration pos.
• Creditorrightspos.& Priority & Creditorsrecovery rate pos.
• Table 9:Fullspecificationsduring Eurozone Crisis
• M aturity & Relationship pos./ Covenantsneg./ LegalX ibid.

14. Results robustness checks II
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• Table 10:Loan & syndicate frictions
• No borrower& lendervariables(sam ple size)
Variables Short m aturity Not secured No league
M aturity + + +
Concentration + n.s. n.s.
Legalenv. + + +
• Table 11:Borrowercountry effects
• Excluding DE,FR,GB,NL
• No borrower& lendervariables(sam ple size)
• M aturity & legalenvironm entsurvives

15. Discussion
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D iscussion
• Contribution to growing em piricalliterature on private debtcontracts
renegotiation
• Determ inantsofbank loan contractdesign following renegotiation in
Europe
• Contractualfrictionsm atter(m aturity,collateral+ lead bank reputation)
• Legalenvironm entm atters(m ore friendly & lessrenegotiation frictions
lead to largerconcessions& deeperreshaping ofthe contract)
• Lenderfinancialconditionsm atter(sound & profitable banksaccept
largerconcessions)
• Econom ic significance:each variable s.d.increase translatesinto 0.15 to
0.3 s.d.changesofrenegotiation package