Download this Paper Open PDF in Browser

Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles

45 Pages Posted: 28 Dec 2015 Last revised: 9 Mar 2017

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business

Seoyoung Kim

Santa Clara University

Date Written: March 7, 2017

Abstract

The shadow banking system comprises special purpose vehicles (SPVs) characterized by high debt, illiquid long-maturity assets funded predominantly by short-maturity debt, and tranched liabilities also known as the capital structure of the SPV. These three features lead to an adversarial game among senior-note holders, who solve for an optimal rollover policy based on the other senior tranches with varying rollover dates. This rollover policy is, in turn, taken into account by capital-note holders (i.e., investors in the equity tranche) when choosing the capital structure (i.e., the assets-to-debt ratio) of the SPV. Rollover risk increases in the number of time tranches, resulting in a lower equilibrium level of debt and higher cost of debt. The expected life of the SPV may also be shortened. We propose a covenant-based capital structure that mitigates these problems and is Pareto-improving for equity and debt holders in the SPV.

Keywords: special purpose vehicle, structured finance, rollover risk, leverage, capital structure, covenants

Suggested Citation

Das, Sanjiv Ranjan and Kim, Seoyoung, Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles (March 7, 2017). Available at SSRN: https://ssrn.com/abstract=2708817 or http://dx.doi.org/10.2139/ssrn.2708817

Sanjiv Ranjan Das

Santa Clara University - Leavey School of Business ( email )

Department of Finance
316M Lucas Hall
Santa Clara, CA 95053
United States

HOME PAGE: http://algo.scu.edu/~sanjivdas/

Seoyoung Kim (Contact Author)

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

Paper statistics

Downloads
42
Abstract Views
189