Syndicated Loans: The Role of Covenants in Mitigating Lender Disagreements

59 Pages Posted: 21 Mar 2011

See all articles by Nishant Dass

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: February 15, 2011

Abstract

We study the role of covenants in syndicated bank loans. We argue that, in addition to being a device for monitoring the borrower, covenants can help mitigate conflicts of interest between the lead-arranger and participating banks in the syndicate. Such disagreements can arise when, for instance, a lead-arranger has the incentive to support a poorly performing borrower and offer loan modification – while other syndicate lenders do not. We develop a simple model and find empirical support for its predictions that covenants are less likely to be present: (i) in non-syndicated versus syndicated loans; (ii) when the lead's loan allocation is greater and (iii) when participating bank affiliates hold substantial equity in the borrower. Consistent with this evidence, we find that lead arrangers are more likely to syndicate with banks that hold borrower equity through affiliated entities.

Keywords: Bank Loans, Conflict of Interest, Covenants, Lending Syndicate, Monitoring

JEL Classification: G20, G21, G32

Suggested Citation

Dass, Nishant and Nanda, Vikram K. and Wang, Qinghai, Syndicated Loans: The Role of Covenants in Mitigating Lender Disagreements (February 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786141 or http://dx.doi.org/10.2139/ssrn.1786141

Nishant Dass (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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