Amendment Thresholds and Voting Rules in Debt Contracts

Abstract

We study the voting rules to modify, amend, and renegotiate syndicated loan contracts. We base our hypotheses on a model that shows how amendment thresholds mitigate agency conflicts within the lending syndicate, and discourage strategic defaults by the borrower. Consistent with our model’s predictions, we find that voting rules are more lenient when the lead lender has prior syndicate relationships with non-lead lenders. We also find that voting rules are more stringent when the lead lender has potential conflicts of interest with non-lead lenders, as evidenced by a prior underwriting relationship with the borrower. Lastly, we show that loan amendment thresholds are negatively associated with default risk, suggesting that contracting parties set the thresholds to avoid inefficient liquidations. Overall, our results indicate that voting rules in loan contracts are shaped by agency problems within the lending syndicate and strategic default considerations.

Keywords: Debt contracting, voting rule, syndicated loan

JEL Classification: D86, G21, G32, K12, M41