Weak Credit Covenants

37 Pages Posted: 9 Aug 2018

See all articles by Victoria Ivashina

Victoria Ivashina

Harvard University; National Bureau of Economic Research (NBER)

Boris Vallee

Harvard Business School - Finance Unit

Date Written: July 23, 2018

Abstract

Using novel data on 1,240 credit agreements for large corporate loans, we show that while inclusion of negative covenants that restrict new debt issuance, payments, asset sales, affiliate transactions and investments is widespread, clauses that weaken these restrictions are almost as common. We measure the deductions for the core covenants in terms of their potential impact on overall leverage and show that they are large, and concentrated in already highly levered transactions. We analyze the cross-sectional variation in contractual weaknesses introduced through deductions and exclusions to negative covenants and show that such contractual provisions are characteristic of leveraged buyouts.

Keywords: Loan Contracts, Debt Covenants, Creditor Governance, Leveraged Buyouts

Suggested Citation

Ivashina, Victoria and Vallee, Boris, Weak Credit Covenants (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3218631 or http://dx.doi.org/10.2139/ssrn.3218631

Victoria Ivashina

Harvard University ( email )

Harvard Business School
Baker Library 233
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boris Vallee (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

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