Agree to Disagree: Within-Syndicate Conflicts and Covenant Design

46 Pages Posted: 31 Aug 2020 Last revised: 7 Jun 2021

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: June 5, 2021

Abstract

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

Chu, Yongqiang and Lin, Luca Xianran and Xiao, Zhanbing, Agree to Disagree: Within-Syndicate Conflicts and Covenant Design (June 5, 2021). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
252
Abstract Views
1,861
rank
155,416
PlumX Metrics