Agree to Disagree: Within-Syndicate Conflicts and Covenant Design
46 Pages Posted: 31 Aug 2020 Last revised: 28 Mar 2023
Date Written: May 31, 2022
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
Suggested Citation: Suggested Citation