IDEAS home Printed from https://ideas.repec.org/a/ers/journl/vxxivy2021i1p410-420.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://ersj.eu/journal/1970/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ambrocio, Gene & Colak, Gonul & Hasan, Iftekhar, 2022. "Commitment or constraint? The effect of loan covenants on merger and acquisition activity," Finance Research Letters, Elsevier, vol. 47(PB).
    2. Zhang, Xinde & Zhou, Simiao, 2018. "Bond covenants and institutional blockholding," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 136-152.
    3. Celil, Hursit S. & Julio, Brandon & Selvam, Srinivasan, 2023. "Investment sensitivity to lender default shocks," Journal of Corporate Finance, Elsevier, vol. 79(C).
    4. Akdoğu, Evrim & Alp Paukowits, Aysun, 2022. "Supply of credit and corporate bond covenants," Journal of Corporate Finance, Elsevier, vol. 72(C).
    5. Haotian Xiang, 2019. "Time Inconsistency and Financial Covenants," 2019 Meeting Papers 63, Society for Economic Dynamics.
    6. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    7. Bazzana, Flavio & Zadorozhnaya, Anna & Gabriele, Roberto, 2018. "The role of covenants in bond issue. The case of Russian companies," Emerging Markets Review, Elsevier, vol. 36(C), pages 1-18.
    8. Dan A. Iancu & Nikolaos Trichakis & Gerry Tsoukalas, 2017. "Is Operating Flexibility Harmful Under Debt?," Management Science, INFORMS, vol. 63(6), pages 1730-1761, June.
    9. Mansi, Sattar A. & Qi, Yaxuan & Wald, John K., 2021. "Bond covenants, bankruptcy risk, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 66(C).
    10. Jean Helwege & Jing-Zhi Huang & Yuan Wang, 2017. "Debt Covenants and Cross-Sectional Equity Returns," Management Science, INFORMS, vol. 63(6), pages 1835-1854, June.
    11. Dutordoir, Marie & Pappas, Kostas & Xu, Alice Liang & Zeng, Cheng (Colin), 2023. "Covenants in convertible bonds: Boon or boilerplate?," Journal of Corporate Finance, Elsevier, vol. 80(C).
    12. Yuqian Wang & Che-Wei Chiu & Mark Wrolstad, 2018. "Do Covenants of Bonds Outstanding Affect the Choice of Covenants of New Issues? Evidence from the U.S. Corporate Bonds," Accounting and Finance Research, Sciedu Press, vol. 7(1), pages 223-223, February.
    13. Charlene P. Spiceland & Leo L. Yang & Joseph H. Zhang, 2016. "Accounting quality, debt covenant design, and the cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1271-1302, November.
    14. Akdoğu, Evrim & Paukowits, Aysun Alp & Celikyurt, Ugur, 2023. "Bondholder governance, takeover likelihood, and division of gains," Journal of Corporate Finance, Elsevier, vol. 79(C).
    15. Sandrine Docgne, 2022. "Bond covenants and investment policy," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 45(3), pages 551-578, September.
    16. Victoria Ivashina & Boris Vallee, 2020. "Weak Credit Covenants," NBER Working Papers 27316, National Bureau of Economic Research, Inc.
    17. Simpson, Marc W. & Grossmann, Axel, 2017. "The value of restrictive covenants in the changing bond market dynamics before and after the financial crisis," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 307-319.
    18. Wang, Jing, 2017. "Debt covenant design and creditor control rights: Evidence from the tightest covenant," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 331-352.
    19. Cline, Brandon N. & Fu, Xudong & Tang, Tian, 2020. "Shareholder investment horizons and bank debt financing," Journal of Banking & Finance, Elsevier, vol. 110(C).
    20. Prilmeier, Robert, 2017. "Why do loans contain covenants? Evidence from lending relationships," Journal of Financial Economics, Elsevier, vol. 123(3), pages 558-579.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:journl:v:xxiv:y:2021:i:1:p:410-420. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://ersj.eu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.