Do Bondholders Value Senior Loan Lender Control Rights?

Abstract

We find that senior loan lender control is positively associated with a firm’s corporate bond yield spread at issuance. A one standard deviation change in the number of covenants on the strictest loan on a firm’s balance sheet is associated with a 15 basis points higher yield spread at bond issuance. Our results are invariant to using the number of financial covenants or covenant strictness to measure senior loan lender control. Using lender-specific shocks for identification produces consistent results. We further find that the positive association of loan lender control and bond yield is more pronounced for issuers with higher default risk and issuers with dispersed bondholders but less pronounced for issuers with relationship lenders.

Keywords: Creditor control; creditor conflict; covenants; syndicated loans; corporate bonds; governance

JEL Classification: G30, G33, G34