Professor Anthony Saunders, Stern School of Business, New York University
This paper examines the dynamic allocation of control rights in private debt contracts of firms that repeatedly borrow in the syndicated loan market using a hand-collected sample of loans extended to US firms during the 1996 to 2010 period. We develop a new and intuitive measure that quantifies the tightness or looseness of financial covenants which we call the “Distance to Covenant Violation” (or “DCV”) measure. We find that new loans after covenant violations have 18bps higher spreads and include more and tighter financial covenants. Lenders increase the number of profitability-based covenants, particularly for those borrowers who require less monitoring based on private information. These results are consistent with the interpretation that covenant violations increase the agency costs of borrowers. Interestingly, we document that repeated borrowing has, on average, no effect on loan spreads but a sizable effect on non-price terms as to fewer and less restrictive covenants emphasising the importance of non-price loan terms in addressing informational and agency problems. We also find evidence that the number of lenders is insignificantly different for loans to borrowers who have violated covenants from those who have not violated covenants in the past, consistent with covenants mitigating supply side frictions in primary loan markets.
Anthony Saunders is the John M. Schiff Professor of Finance at NYU Stern. Professor Saunders received his PhD from the London School of Economics and has taught both undergraduate and graduate level courses at NYU since 1978. Throughout his academic career, his teaching and research have specialised in financial institutions and international banking. He has served as a visiting professor all over the world, including INSEAD, the Stockholm School of Economics, and the University of Melbourne.