Agree to Disagree: Lender Equity Holdings, Within-Syndicate Conflicts, and Covenant Design
47 Pages Posted: 31 Aug 2020 Last revised: 9 Nov 2023
Date Written: November 8, 2023
Abstract
Lenders' simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. We argue that lenders address such within-syndicate conflicts with financial covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance-based covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflict loans rely more on capital-based covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Overall, these results suggest that such conflicts can reduce capital flexibility and renegotiation efficiency for the borrowers.
Keywords: Within-Syndicate Conflict, Syndicated Loan, Dual Holders, Loan Covenants
JEL Classification: G23, G32, G34
Suggested Citation: Suggested Citation