Concentration of Control Rights in Leveraged Loan Syndicates

57 Pages Posted: 1 May 2017 Last revised: 27 Sep 2019

See all articles by Mitchell Berlin

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department

Greg Nini

Drexel University - Department of Finance

Edison Yu

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: September 25, 2019

Abstract

We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite loans—borrowing firms' revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.

Keywords: Covenant, Cov-Lite, Leveraged Loans, Monitoring, Control Rights, Institutional Loans

JEL Classification: G21, G23, G38

Suggested Citation

Berlin, Mitchell and Nini, Gregory and Yu, Edison, Concentration of Control Rights in Leveraged Loan Syndicates (September 25, 2019). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2960757 or http://dx.doi.org/10.2139/ssrn.2960757

Mitchell Berlin

Federal Reserve Bank of Philadelphia - Research Department ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
215-574-3822 (Phone)
215-574-4364 (Fax)

Gregory Nini

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Edison Yu (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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