Losing Control: The 20-Year Decline in Loan Covenant Restrictions

49 Pages Posted: 27 Nov 2018

See all articles by Thomas P. Griffin

Thomas P. Griffin

Villanova University - Department of Finance

Greg Nini

Drexel University - Department of Finance

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: November 2, 2018

Abstract

Over the last twenty years, financial covenants in syndicated loan agreements have steadily become looser. The result is that the fraction of U.S. public companies reporting a violation of a loan covenant during a given year decreased from over 12% in 1997 to less than 5% in 2016. Although the decline accelerates in recent years, the trend is present prior to the recent financial crisis. The trend cannot be explained by changes in the composition of public firms, a decrease in the usage of debt, or a long series of positive ex-post outcomes for firms. Nor does the rise in institutional lenders or an increased supply of credit explain the decline. The loosening of covenants is widespread among all types of borrowers and loans and accompanies an increase in loan spreads over the period, suggesting that the trend reflects fundamental changes in the costs and benefits of tight covenants.

Keywords: loan covenants, covenant violations, creditor control, corporate governance, leveraged loans

JEL Classification: G21, G32, G34

Suggested Citation

Griffin, Thomas and Nini, Gregory and Smith, David Carl, Losing Control: The 20-Year Decline in Loan Covenant Restrictions (November 2, 2018). Available at SSRN: https://ssrn.com/abstract=3277570 or http://dx.doi.org/10.2139/ssrn.3277570

Thomas Griffin

Villanova University - Department of Finance ( email )

United States

HOME PAGE: http://www.thomaspgriffin.com

Gregory Nini

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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