Corporate Loan Securitization and the Standardization of Financial Covenants

51 Pages Posted: 4 Oct 2016 Last revised: 1 Jun 2018

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business

Maria Loumioti

The University of Texas at Dallas

Florin P. Vasvari

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2017

Abstract

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

Bozanic, Zahn and Loumioti, Maria and Vasvari, Florin P., Corporate Loan Securitization and the Standardization of Financial Covenants (August 24, 2017). Journal of Accounting Research, 2018, Vol. 56(1), 45-83. Available at SSRN: https://ssrn.com/abstract=2846703 or http://dx.doi.org/10.2139/ssrn.2846703

Zahn Bozanic

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Maria Loumioti (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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