Agree to Disagree: Within-Syndicate Conflict and Syndicated Loan Contracting

Abstract

Prior studies show that creditors’ simultaneous equity holding mitigates shareholder-creditor conflict. We show that a new type of conflict arises in syndicates with such dual holders, due to the heterogeneity across syndicate members’ 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 also less likely as conflict increases. Instead, high-conflict loans rely more on capital covenants, which align shareholder-creditor interests ex-ante and incentivize shareholders to monitor. Moreover, lead arrangers retain larger shares in high-conflict loans to commit to monitoring beyond contractual provisions. Finally, high-conflict loans tend to be smaller, shorter, and more costly.

Keywords: Within-Syndicate Conflict, Syndicated Loan, Dual Holders, Loan Covenants

JEL Classification: G23, G32, G34