Syndicated Loan Risk: The Effects of Covenants and Collateral

51 Pages Posted: 27 Apr 2021

See all articles by Jianglin Dennis Ding

Jianglin Dennis Ding

Roger Williams University - Gabelli School of Business

George Pennacchi

University of Illinois

Date Written: April 16, 2021

Abstract

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

Ding, Jianglin Dennis and Pennacchi, George G., Syndicated Loan Risk: The Effects of Covenants and Collateral (April 16, 2021). Available at SSRN: https://ssrn.com/abstract=3828153 or http://dx.doi.org/10.2139/ssrn.3828153

Jianglin Dennis Ding

Roger Williams University - Gabelli School of Business ( email )

Bristol, RI 02809
United States

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://https://giesbusiness.illinois.edu/profile/george-pennacchi

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