Agree to Disagree: Within-Syndicate Conflicts and Covenant Design
46 Pages Posted: 31 Aug 2020 Last revised: 7 Jun 2021
Date Written: June 5, 2021
Prior studies show that creditors' simultaneous equity holding mitigates shareholder-creditor conflicts. We show that a new type of conflicts arise in syndicates with dual holders due to the heterogeneity of syndicate members' relative equity-to-loan positions. We find that loans with higher within-syndicate conflicts rely less on performance covenants, which serve as tripwires to facilitate ex-post control transfer from shareholders to creditors. Renegotiation is less likely as the conflicts increase. Instead, high-conflicts loans rely more on capital covenants, which align shareholder-creditor interests ex-ante and incentivize shareholder monitoring. Furthermore, high-conflicts loans are more likely to be credit lines and are more costly.
Keywords: Within-Syndicate Conflict, Syndicated Loan, Dual Holders, Loan Covenants
JEL Classification: G23, G32, G34
Suggested Citation: Suggested Citation