Creditor Control Rights and Borrower Protection: The Role of Borrower Consent Clause in Private Debt Contracts

52 Pages Posted: 18 Sep 2019

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond

Saiying Deng

Kent State University

Yutao Li

University of Lethbridge

Date Written: September 9, 2019

Abstract

In private debt contracts with a borrower consent clause, a creditor’s decision to transfer its portion of the loan can be thwarted if the borrower denies the consent to loan transfer. We find that the probability of the inclusion of a borrower consent clause in a private debt contract increases in the intensity of accompanying creditor control rights in the contract. This association is more pronounced for larger and less risky borrowers. We also find that loans with a borrower consent clause have lower secondary market liquidity and larger stock market returns around the announcement of the loans. We argue that consent clauses are important contractual innovations that are created to protect borrowers in response to the rise of the originate-to-distribute model of banking and the recent increase in nonbank investors’ interest in the corporate loan market.

Keywords: Borrower consent clause; Creditor control rights, Loan assignment, Secondary loan market, Incomplete contracting

JEL Classification: G21, G30, L14

Suggested Citation

Beyhaghi, Mehdi and Deng, Saiying and Li, Yutao, Creditor Control Rights and Borrower Protection: The Role of Borrower Consent Clause in Private Debt Contracts (September 9, 2019). Available at SSRN: https://ssrn.com/abstract=3450889 or http://dx.doi.org/10.2139/ssrn.3450889

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Saiying Deng (Contact Author)

Kent State University ( email )

College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
3306721213 (Phone)

Yutao Li

University of Lethbridge ( email )

Lethbridge, Alberta T1K5E8
Canada

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