What drives the dynamics of bank debt renegotiation in Europe?

1. What drives the dynamics of bank debt
renegotiation in Europe?
A survival analysis approach
Christophe J. Godlewski
UHA & EM Strasbourg (LaRGE Research Center)
6th IFABS Conference 2014, Lisbon
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3. Take away
• Determinants of bank loan renegotiation dynamics
• Initial loan contract, lenders, amendments, country
characteristics
• 1.600 loan amendments (1999-2011)
• Cross-country sample: 28 European countries
• Survival analysis using stratified Cox-type hazard model
• Median duration b/w renegotiations = 1 year
• Frequently amended contracts renegotiated every 5
months
• Role of complexity, informational frictions, economic
uncertainty, legal protection
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4. Background
• Contracting parties unable / unwilling to commit to initial
contract = > debt renegotiation
• When unanticipated / non-contractible state of the world occurs
• Restrictiveness of initial loan contract
• Changing initial loan terms => mutual gain for both parties
• Renegotiation
 Signaling game => influence lender
 Bargaining power (borrower: + shock / + credit quality)
 Reputation device (lender perspective)
 Influence borrower incentives (opportunism)
 Costly (fees, time, effort, coordination…)
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5. Background (cont.)
• Theoretical evidence (Hart & Moore 1988 … Garleanu & Zwiebel
2009)
 Contract renegotiation has profound impact on security
design, incentives & welfare
 Can enhance contract efficiency
• Empirical evidence (Roberts & Sufi 2009, Roberts 2012, Nikolaev
2013)
 Credit agreements renegotiated often & early
 Large changes to initial loan characteristics
 Arrival of new information triggers renegotiation
 Uncertainty, information frictions, agency conflicts... affect
scope for renegotiation
 Lenders learn of the borrower quality => improve contract
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6. Empirical design | Data
• Bloomberg Professional Terminal Server
• Loan amendments (date + details of amended terms)
• Loan characteristics at origination (size, maturity, covenants,
collateral, type, purpose…)
• Banking pool (lenders, syndication, lead banks)
• Country variables from GFDD + Djankov et al. (2007)
• Creditor rights, legal origin, financial development (credit, bond,
stock markets)
• 1.600 amendments – 669 companies
• 28 countries (DE + ES + FR + LU + NL + UK = 70% of sample)
• Time span: 1/1/1999-30/6/2011
[Descriptive statistics: see Fig. 1 + Tab. 1, 2, 3]
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7. Empirical design | Data (cont.)
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8. Empirical design | Methodology
• Multiple-failure (or survival) data
• Conditional risk set model by Prentice et al. (1981)
• Stratified Cox-type model (hazard function shape depends on
number of preceding events)
• Assume subject (loan) is not at risk of second event
(renegotiation) until the first has occurred
• Assume event dependence (renegotiations are related)
• Two variations w/r clock time
• Elapsed time (time measured from entry date) [1]
• Gap time (time measured from previous event) [2]
[Numerical illustration in appendix A]
휆 푡 퐹푡− = 휆0푘 푡 푒훽푘′
푍(푡) (1)
휆 푡 퐹푡− = 휆0푘 푡 − 푡푘−1 푒훽푘′
푍(푡) (2)
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9. Empirical design | Methodology – num. ex.
T start = 13.8
Counter = 1
Duration =
13.8
T start = 29.6
Counter = 2
Duration =
15.8
Counter = 3
Duration =
4.3
Gap time = 15.8
T start = 0
T stop = 13.8
T stop = 29.6
T stop = 33.9
Elapsed time = 29.6
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10. Empirical design – survival & hazard
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11. Results
Variable Mean Std. Dev.
Duration (months) 19.19 20.14
Amendment types by renegotiation 1.88 1.30
Amendment types by loan 2.53 1.42
Renegotiation / maturity (%) 0.41 0.39
Difference in maturity (years) 1.61 4.17
Difference in amounts (%) 0.13 2.66
Facility amount (mln $) 1 191.82 3 010.56
Maturity (years) 6.36 3.34
Spread (bps) 223.59 182.72
Syndication (%) 0.83 0.38
Secured (%) 0.60 0.49
Covenants (%) 0.40 0.49
Lenders 13.78 17.30
Leaders (%) 0.50 0.38
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12. Results (cont.)
N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%)
Elapsed time Gap time
Variable / Model (1.1) (2.1) (3.1) (4.1) (1.2) (2.2) (3.2) (4.2)
Facility amount 0.93 0.92 0.97 0.90 0.81 0.82 0.90 0.91
Maturity 0.86 0.87 0.23 0.18 0.85 0.87 0.53 0.45
Syndication 0.07 0.05 0.03 0.05 0.09 0.05 0.03 0.04
Leaders 23.72 21.80 16.19 22.17 13.88 20.81 6.90 28.64
Δ Facility amount 7.41 10.64 1.31 1.56 2.70 0.34
Δ Maturity 0.84 0.79 0.85 0.30 0.19 0.25
Δ Outstanding amount 1.52 7.43 5.90 0.31 0.69 0.30
Δ Definition 3.41 3.09 2.72 1.07 0.88 1.03
Amendment types by loan 2.67 2.96 2.87 2.58
Amendments by borrower 0.82 0.84 0.79 0.93
Renegotiation / Maturity 0.00 0.00 0.00 0.00
French legal origin 11.05 11.08
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13. Results (cont.)
N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%)
Elapsed time Gap time
Variable / Model (4.1a) (4.1b) (4.1c) (4.1d) (4.2a) (4.2b) (4.2c) (4.2d)
Crisis 0.02 0.01 0.01 0.02 0.05 0.08 0.19 0.04
Same region 1.02* 1.04
Same EU member 1.02* 1.02
Same EZ member 0.96 0.97
Coefficients of other variables remain similar
Notable exception for financial development variables (significant & HR > 1)
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14. Discussion
• Design & efficiency of loan contracts
• Determinants of debt contract renegotiation dynamics in
Europe
• Multiple failure-time date with repeated & ordered events
• ¼ renegotiations are multiple
• Large changes initial loan terms: +25% to maturity; +13% to
amount
• Median duration b/w renegotiations = 1 year
• Frequently amended contracts renegotiatied every 5 months
• Contract complexity + information frictions + uncertainty +
legislation = major role in shaping bank loan contracts over
time
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