Corporate Loan Securitization and the Standardization of Financial Covenants
51 Pages Posted: 4 Oct 2016 Last revised: 1 Jun 2018
Date Written: August 24, 2017
We examine whether syndicated loans securitized through Collateralized Loan Obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than non-securitized institutional loans. In addition, we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization alleviates information processing costs related to loan monitoring and screening. We also document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.
Keywords: Securitization, Standardization, Collateralized Loan Obligations (CLO), Financial Covenants, Syndicated Loans
JEL Classification: G17, G21, G32, M41
Suggested Citation: Suggested Citation