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Covenant Based Credit Capacity Model for Real Estate Capital Groups: Evidence from Poland

Author

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  • Zbigniew Korzeb
  • Pawel Niedziolka

Abstract

Purpose: The study aims to specify the form of the model used to determine the ability to obtain external financing (net debt) by real estate capital groups. The study also focuses on verifying the covenant function as a tool to limit the scale of projects implemented by real estate holdings. Approach/Methodology/Design: The analysis was carried out based on consolidated financial data of all (residential, commercial, and residential/commercial) real estate capital groups whose bonds are listed on the Catalyst bond in Poland. However, the said model is universal. The paper uses a method of examining documents, a method of analysis, and logical and qualitative construction to formulate new hypotheses, which can then be verified using a quantitative approach based on a larger sample. The Pearson correlation coefficient determined the relationship strength among covenants' pairs and between covenants and sensitivity ratio for the sample and the significance by the statistics t. Findings: The initiative to select covenants and determine their levels lies with issuers rather than investors. The inclusion of ND/EBITDA covenant in 75% of cases would mean an important reduction in credit exposure. The significant correlation among covenants identified in the study means duplication of information about the issuer's risk. Practical Implications: This study's conclusions can be used in the process of structuring the terms and conditions of corporate bond issues and provide important and new information primarily for bondholders in the context of leverage potential and the possibility of risk monitoring using covenants. The application contribution refers to the conclusions from the analysis of the monitoring potential of financial covenants and the influence of covenants on the change in the potential of capital groups due to the tightening of banks' credit policy at the level of special purpose vehicles. Originality/Value: The results of the analysis and theoretical considerations in this article complement existing research in the field of covenants' application by different stakeholders of bond issue programs.

Suggested Citation

  • Zbigniew Korzeb & Pawel Niedziolka, 2021. "Covenant Based Credit Capacity Model for Real Estate Capital Groups: Evidence from Poland," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 410-420.
    • Handle: RePEc:ers:journl:v:xxiv:y:2021:i:1:p:410-420
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    References listed on IDEAS

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    1. Reisel, Natalia, 2014. "On the value of restrictive covenants: Empirical investigation of public bond issues," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 251-268.
    2. Achleitner, Ann-Kristin & Braun, Reiner & Tappeiner, Florian, 2009. "Structure and determinants of financial covenants in leveraged buyouts - evidence from an economy with strong creditor rights," CEFS Working Paper Series 2009-15, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
    3. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    4. Becker, Bo & Ivashina, Victoria, 2016. "Covenant-Light Contracts And Creditor Coordination," Working Paper Series 325, Sveriges Riksbank (Central Bank of Sweden).
    5. Matthew T. Billett & Tao‐Hsien Dolly King & David C. Mauer, 2007. "Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants," Journal of Finance, American Finance Association, vol. 62(2), pages 697-730, April.
    6. Michael Bradley & Michael R. Roberts, 2015. "The Structure and Pricing of Corporate Debt Covenants," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-37.
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    More about this item

    Keywords

    Corporate bonds; financial covenants; credit risk; monitoring.;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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