Syndicated Loan Risk: The Effects of Covenants and Collateral
51 Pages Posted: 27 Apr 2021
Date Written: April 16, 2021
This paper presents a new approach that quantifies how a credit rating agency and investors judge the effects of collateral and various covenants on syndicated loan risk. It addresses firms’ self-selection of these contract terms by analyzing how a loan’s collateral and covenants affect: 1) the difference between the loan’s credit rating and the senior, unsecured credit rating of the borrowing firm; and 2) the difference between the borrowing firm’s senior, unsecured CDS spread and its loan’s credit spread. The results show that the rating agency and investors agree that a collateral requirement, a capital expenditure covenant, and a dividend restriction covenant are most important for reducing a loan’s credit risk. However, equity issuance and excess cashflow sweeps increase a loan’s risk.
Keywords: syndicated loan, covenants, collateral
JEL Classification: G12, G21, G32
Suggested Citation: Suggested Citation