Agree to Disagree: Within-Syndicate Conflicts and Covenant Design

46 Pages Posted: 31 Aug 2020 Last revised: 9 Jun 2022

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Luca X. Lin

HEC Montreal - Department of Finance

Zhanbing Xiao

The University of British Columbia

Date Written: May 31, 2022

Abstract

Lenders' simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. The heterogeneity in lenders' relative equity-to-loan positions complicates ex-post renegotiation. We argue that lenders address such within-syndicate conflicts with accounting-based covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflicts loans rely more on capital covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Furthermore, voting rules on loan amendments are stricter in high-conflict loans.

Keywords: Within-Syndicate Conflict, Syndicated Loan, Dual Holders, Loan Covenants

JEL Classification: G23, G32, G34

Suggested Citation

Chu, Yongqiang and Lin, Luca Xianran and Xiao, Zhanbing, Agree to Disagree: Within-Syndicate Conflicts and Covenant Design (May 31, 2022). Available at SSRN: https://ssrn.com/abstract=3658451 or http://dx.doi.org/10.2139/ssrn.3658451

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Zhanbing Xiao

The University of British Columbia ( email )

Vancouver, British Columbia
Canada

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

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