Agree to Disagree: Within-Syndicate Conflicts and Covenant Design

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