Securities laws, bank monitoring, and the choice between cov-lite loans and bonds for highly levered firms

Fisher College of Business Working Paper No. 2019-03-01

Charles A. Dice Center Working Paper No. 2019-1

83 Pages Posted: 12 Jan 2019 Last revised: 23 Jun 2020

See all articles by Robert Prilmeier

Robert Prilmeier

Tulane University - A.B. Freeman School of Business

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2020

Abstract

In contrast to bonds, cov-lite loans do not require SEC registration and are not subject to securities laws. We show that this distinction plays an important role in firms’ choice between funding through cov-lite loans and bonds and helps understand why the market share of cov-lite loans has been so high in recent normal times. Compared to cov-heavy loans, cov-lite loans are closer substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans.

Keywords: Debt contracting, covenants, securities laws, regulation, loan trading

JEL Classification: G32, G18, G23, D82

Suggested Citation

Prilmeier, Robert and Stulz, Rene M., Securities laws, bank monitoring, and the choice between cov-lite loans and bonds for highly levered firms (June 18, 2020). Fisher College of Business Working Paper No. 2019-03-01, Charles A. Dice Center Working Paper No. 2019-1, Available at SSRN: https://ssrn.com/abstract=3314270 or http://dx.doi.org/10.2139/ssrn.3314270

Robert Prilmeier

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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