Weak Credit Covenants
37 Pages Posted: 9 Aug 2018
Date Written: July 23, 2018
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
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