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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 W hatIdo Literature Em pirical design Results Discussion
- 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 M otivations W hatIdo Literature Em pirical design Results Discussion
- 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 W hat Ido Literature Em pirical design Results 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) M otivations W hatIdo Literature Em pirical design Results Discussion
- 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 M otivations W hatIdo Literature Em pirical design Results Discussion
- 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 M otivations W hatIdo Literature Em pirical design Results Discussion
- 8. Results figures I M otivations W hatIdo Literature Em pirical design Results Discussion 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 M otivations W hatIdo Literature Em pirical design Results Discussion 05101520 percent 000001 000010 000011 000100 000110 000111 001000 001001 001010 001011 001100 001101 001110 001111 010000 010001 010010 010011 010100 010101 010110 011000 011001 011010 011011 011100 011101 011110 011111 100000 100001 100010 100011 100100 100110 100111 101000 101001 101010 101011 101101 101110 101111 110000 110001 110010 110011 110101 110110 110111 111000 111001 111010 111011 111100 111110 111111 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. M otivations W hatIdo Literature Em pirical design Results Discussion • 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 M otivations W hatIdo Literature Em pirical design Results Discussion • 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 M otivations W hatIdo Literature Em pirical design Results Discussion • 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 M otivations W hatIdo Literature Em pirical design Results Discussion • 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 M otivations W hatIdo Literature Em pirical design Results Discussion • 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 M otivations W hatIdo Literature Em pirical design Results 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