Does Utility Regulation Substitute for Debt Covenants?
30 Pages Posted: 4 Sep 2009
Date Written: September 1, 2009
Governmental regulation and debt covenants both restrict a firm’s choices. We hypothesize that state-level regulation of utility companies will substitute for debt covenants and test this by examining the use of such covenants in publicly-held debt between 1985 and 2003. In general, our findings support this hypothesis. We find that debt covenants (except effective maturity covenants) occur in fewer utility company debt issues than for a matched sample of non-utilities. However, we find that the variability in the level of state regulation only affects the use of financing debt covenants by utilities, suggesting that the credit market considers state regulation to be homogenous for most other debt covenants despite differing state ratings. We also find some differences in debt covenant usage by type of utility: gas or electric.
Keywords: debt covenants, utilities
JEL Classification: L95
Suggested Citation: Suggested Citation