This document analyzes the influence of financial institutions' network positions on private debt renegotiation in Europe between 1999-2017. The study finds that lenders with more central network positions, as measured by betweenness, closeness, and degree centrality, have a positive influence on the loan renegotiation process. Specifically, central lenders are associated with a higher likelihood of renegotiation occurring, as well as more rounds of renegotiation and more amendments to loan terms. This effect is attributed to central lenders' superior access to information, greater experience, and stronger reputation capital encouraging more flexible renegotiation.

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Private debt renegotiation
and
financial institutions’ network
Christophe Godlewski & Bulat Sanditov
Université de Strasbourg & Université Paris-Saclay

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We study the influence of financial institutions’ network (position,
i.e. centrality) on private debt renegotiation (outside of distress)
• Financial contracting literature (design of private debt contracts)
+ social network analysis of credit markets & financial institutions
(information production, experience, reputation, trust)
• Major advantage of private debt contracts = flexibility =>
renegotiation = ex-post remedy to initial contractual
incompleteness (e.g. Hart & Moore 1999)
BACKGROUND

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• Initial conditions are important drivers of loan renegotiation
• Depend on lenders’ access to timely, relevant, valuable
information; experience, reputation, trust => collaboration &
reciprocity = social capital (e.g. Cagno & Sciubba 2010)
• Syndicated loans market = information & capital networks
• Rely on reputable, trustworthy, experienced (lead) banks =>
enhanced monitoring & screening, signal deal quality, mitigate
information asymmetries & agency costs
• Social network shapes patterns of exchanges => strategic
positions (centrality) = competitive advantage (access / control
over resources)(e.g. Baum et al. 2004)
BACKGROUND

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• Centrality = access resources => valuable private information =>
better monitoring & screening
• Centrality = constraints on opportunistic behavior => reputation
capital
• Information, experience, trust values of centrality => mitigate
adverse selection & moral hazard of renegotiation => lower costs
=> positive influence on loan renegotiation
• But central lenders are expected to write “better”, more
“complete” initial contracts + Threat of losing reputation by
making “wrong” renegotiation decision => negative influence on
loan renegotiation
BACKGROUND

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• Focus on Europe because bank based financial system (private
debt = major source of external financing for firms) + legal
environment less protective of creditors (importance of loan
contract design)
• Contribution to literature on private debt renegotiation (e.g.
Nikolaev 2018); role of connections, networking, reputation in
bank lending (e.g. Gatti et al. 2013); social network analysis of
syndicated lending (e.g. Houston et al. 2018) => focus on loan
renegotiation
BACKGROUND

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• Information on loan amendments, initial credit agreements,
lenders, and borrowers from Bloomberg
• Information on country level data (economy, finance, law) from
World Bank
• 6361 loans issued to 4805 firms involving 238 lenders in 25
European countries between 1999 & 2017
• Relations between lead & participant banks only + overlapping
moving 3-year windows (dynamic structure of syndication
network)
• 3 most common centrality measures = degree, closeness,
betweenness
EMPIRICAL DESIGN

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• Betweenness = network position (strategic / bridge /
intermediary)
• Closeness = network proximity (depth / close to center)
• Degree = network involvement / size (local neighborhood)
• Maximum centrality => most central member / maximum
informedness
• Renegotiation process = decision or likelihood (1/0), dynamics (#
rounds: 1-12), scope (# amended terms: 1-6)
• => Logit, ordered logit, poisson regressions
• Control for loan, syndicate, borrower, country level variables
EMPIRICAL DESIGN

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RESULTS
European syndicated loans market network of lenders (2002-2017)

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RESULTS
Variable Mean SD
Renegotiation 0.33 0.47
Rounds 2.62 2.51
Amendments 2.18 1.28
Betweenness 0.10 0.06
Closeness 0.44 0.14
Degree 0.22 0.09
Facility 1139.51 3000.69
Maturity 6.61 3.82
Secured 0.43 0.50
Covenants 0.10 0.30
Outstanding
amount
3.17 40.82
Previous issues 3.75 2.89
# lenders 10.48 10.31
League 0.19 0.39
Relationship 0.25 0.43
% same country 0.23 0.29
Rating 0.10 0.30
• UK, France, Spain, Germany,
Netherlands, Italy = 81% of the
sample
• Higher centrality associated with
larger loans with covenants, funded
by larger syndicates and more
league table lenders, to larger
borrowers with greater leverage and
lower liquidity, more often rated,
with larger outstanding amounts
and more previous loan issues

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RESULTS

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RESULTS

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RESULTS

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RESULTS

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RESULTS

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Summary of main findings
• We confirm the hypothesis that central lenders have a positive
influence on the entire renegotiation process
• We do not validate the alternative hypothesis that central lenders
are able to write more “complete” contracts at origination which
are more renegotiation-proof or that the threat of harming their
reputation capital by making the “wrong” renegotiation decision
reduces the lenders’ willingness to enter a renegotiation process
• Access to superior information, greater experience, reputation,
and trust encourages renegotiation
RESULTS

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Robustness checks at “micro” & “macro” levels
• Micro = specific renegotiation, loan, and syndicate characteristics
• Unique renegotiation, unique loan, first loan
• Small loan, short maturity, no collateral, no covenants, many tranches, few
past issues
• Small syndicates, no league table lender, no relationship, no rating, adding
bank fixed effects, excluding “top dogs”
• Macro = specific country and time characteristics
• Weak rule of law, weak protection of creditors against shareholders in case
of default, low creditors recovery
• Excluding UK, only historical core EZ, only GIIPS, only post crisis periods (US
and EZ)
RESULTS

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Summary of robustness results
• Main results survive => network-central lenders have a positive
influence on the entire renegotiation process (superior
information, greater experience, reputation, and trust)
• Additional findings:
• Centrality becomes non-significant for renegotiation of
complex deals with multiple tranches
• Legal and institutional environments with weaker protection
of creditors make the value of centrality less relevant for
renegotiation
RESULTS

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• We provide an empirical link between the social network analysis of credit
markets and the design of loan contracts
• We use a large sample of more than 6 000 loans issued in 25 European countries
• We find that lender’s network-centrality (Betweenness, Closeness, Degree) has a
significant and positive influence on the loan renegotiation process
(renegotiation likelihood, # renegotiation rounds, # amendments)
• Our findings confirm that access to superior information, greater experience,
reputation, and trust encourages renegotiation
FINAL WORDS