Renegotiation of Financial Contracts: Evidence from Private Credit Agreements

63 Pages Posted: 28 Sep 2007 Last revised: 13 Dec 2011

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Amir Sufi

University of Chicago - Booth School of Business; NBER

Date Written: July 31, 2008

Abstract

Using a large sample of private credit agreements between US publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. Our analysis of the determinants of renegotiation reveal that the accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.

Keywords: Renegotiation, Bargaining, Incomplete Contracts, Security Design, Bank Loans

JEL Classification: G32, G21, C78, L14

Suggested Citation

Roberts, Michael R. and Sufi, Amir, Renegotiation of Financial Contracts: Evidence from Private Credit Agreements (July 31, 2008). Available at SSRN: https://ssrn.com/abstract=1017629 or http://dx.doi.org/10.2139/ssrn.1017629

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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