Financial Covenants and Their Restrictiveness in European LBOS – An assessment in the Aftermath of the Financial Crisis

International Journal of Entrepreneurial Venturing, Vol. 4, No. 3, 2012, pp. 214–238

Posted: 21 Jan 2014

See all articles by Ann‐Kristin Achleitner

Ann‐Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Carolin Bock

Technische Universität Darmstadt

Florian Tappeiner

Technische Universität München - Center for Entrepreneurial and Financial Studies

Date Written: October 1, 2012

Abstract

Financial covenants play a crucial role in mitigating agency conflicts in loan agreements of high leverage. In a European-wide qualitative survey among private equity experts, we assessed the impact of the financial crisis on financial covenants in leveraged buyout transactions. We concentrated on the factors that drive covenant restrictiveness by measuring the change of headroom as the most influential factor determining restrictiveness. The survey of 25 lead arrangers and private equity sponsors indicates that financial covenants mainly serve the purpose of managing the risk of the transactions and that leverage, interest cover, cash flow cover, and capex constitute the most important covenants. Their restrictiveness increased heavily during the financial crisis. The liquidity of debt markets, the deal pressure for mandated lead arrangers and the private equity sponsor’s history of covenant breaches represent the drivers of highest importance for covenant restrictiveness.

Keywords: covenants, financial covenants, agency conflict, debt, leveraged buyout, LBO, financial crisis, private equity, credit, banks, syndicated loans

Suggested Citation

Achleitner, Ann-Kristin and Bock, Carolin and Tappeiner, Florian, Financial Covenants and Their Restrictiveness in European LBOS – An assessment in the Aftermath of the Financial Crisis (October 1, 2012). International Journal of Entrepreneurial Venturing, Vol. 4, No. 3, 2012, pp. 214–238, Available at SSRN: https://ssrn.com/abstract=2379717

Ann-Kristin Achleitner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25181 (Phone)

Carolin Bock (Contact Author)

Technische Universität Darmstadt ( email )

Hochschulstr. 1
Darmstadt, 64289
Germany

HOME PAGE: http://www.ent.tu-darmstadt.de

Florian Tappeiner

Technische Universität München - Center for Entrepreneurial and Financial Studies ( email )

Arcisstr. 21
Munich, 80333
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
901
PlumX Metrics