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Modelling the probability of asset value covenant violations in shipping bank loans

Author

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  • Nikos D. Kagkarakis
  • Dimitris A. Tsouknidis

Abstract

This paper aims to model the probability of a borrower violating an asset value covenant in a shipping bank loan agreement, where the main collateral (the vessel) exhibits very high price volatility. We estimate a panel data regression model using the largest dataset of shipping bank loans examined to date. The results reveal that loan-specific variables, particularly the amount of loan, advance ratio, and existence of a holding company guarantee, are the most important factors affecting the probability of observing an asset value covenant violation. These results are important for ship-lending financial institutions because: 1) vessel prices serve as the main collateral in bank loan agreements; 2) vessel prices are significantly larger in magnitude and much more volatile when compared to other widely examined asset-backed loan agreements, such as mortgages.

Suggested Citation

  • Nikos D. Kagkarakis & Dimitris A. Tsouknidis, 2024. "Modelling the probability of asset value covenant violations in shipping bank loans," International Journal of Banking, Accounting and Finance, Inderscience Enterprises Ltd, vol. 14(3), pages 324-346.
    • Handle: RePEc:ids:injbaf:v:14:y:2024:i:3:p:324-346
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