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 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. Furthermore, voting rules on loan amendments during ex-post renegotiations are stricter in high-conflict loans, by requiring consent from more syndicate members. 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