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Restrictive Clauses in Loan Contracts: A Sequential Stackelberg Game Interpretation

Author

Listed:
  • Michèle Breton

    (HEC Montréal)

  • Tiguéné Nabassaga

    (HEC Montréal
    BNP Paribas CIB)

Abstract

We propose a dynamic stochastic game model to assess the value of restrictive clauses in private loan contracts. Restrictive clauses are used by lenders to mitigate their credit risk, for instance, by linking the interest payments of the borrower to some observable performance measure. We show how the value of these clauses for the lender and the borrower corresponds to the solution of a feedback Stackelberg game in discrete time. We consider two instances of restrictive clauses that are commonly found in the syndicated loan market, namely safety covenants and performance pricing, and provide numerical illustrations using representative instances to compare their relative efficiency.

Suggested Citation

  • Michèle Breton & Tiguéné Nabassaga, 2025. "Restrictive Clauses in Loan Contracts: A Sequential Stackelberg Game Interpretation," Dynamic Games and Applications, Springer, vol. 15(1), pages 28-47, March.
    • Handle: RePEc:spr:dyngam:v:15:y:2025:i:1:d:10.1007_s13235-025-00626-6
    DOI: 10.1007/s13235-025-00626-6
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