Covenant Violations, Collateral and Credit Access: Public and Private Firms

41 Pages Posted: 3 May 2016 Last revised: 15 Oct 2018

See all articles by Irina Barakova

Irina Barakova

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Mohammad Nazmul Hasan

Office of the Comptroller of the Currency - Risk Analysis Division

Harini Parthasarathy

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: October 4, 2018

Abstract

We study the impact of covenant violations on credit access for privately-held and publicly-traded firms, using a rich supervisory dataset of syndicated loans from 2006-2012. Leveraging the unique information on covenant compliance, collateral and default risk in the data, we show that banks are substantially less likely to forgive covenant violations by private firms. Hence, private firms, especially those with assets below $1 billion, experience more severe credit cuts than comparable public firms after violations. We find that collateral plays an important role in alleviating credit rationing for private firms after covenant violations. In addition, an external rating or an established presence in the syndicated loan market helps private firms to preserve loan access. Recessions aggravate credit constraints due to increased violations, stressed collateral values and tighter lending standards. We conclude that banks’ use of the covenant channel disproportionately impacts private firms’ credit access and may further exacerbate the impact of business cycles.

Keywords: Covenant Violations, Waiver, Private Firms, Collateral, Recession, Syndicated Loans, Limit Cut

JEL Classification: G21, G32

Suggested Citation

Barakova, Irina and Hasan, Mohammad Nazmul and Parthasarathy, Harini, Covenant Violations, Collateral and Credit Access: Public and Private Firms (October 4, 2018). Available at SSRN: https://ssrn.com/abstract=2773233 or http://dx.doi.org/10.2139/ssrn.2773233

Irina Barakova

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Mohammad Nazmul Hasan

Office of the Comptroller of the Currency - Risk Analysis Division ( email )

400 7th Street, SW
Mail Stop 63-3
Washington, DC 20219-0001
United States

Harini Parthasarathy (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

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