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Concentration of Control Rights in Leveraged Loan Syndicates

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  • Mitchell Berlin
  • Gregory P. Nini
  • Edison Yu

Abstract

We ?nd that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without ?nancial covenants?so-called covenant-lite loans?borrowing ?rms? revolving lines of credit almost always retain traditional ?nancial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the ?nancial covenants, and we con?rm that loans with split control rights are still subject to the discipline of ?nancial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the ?nancial crisis.

Suggested Citation

  • Mitchell Berlin & Gregory P. Nini & Edison Yu, 2019. "Concentration of Control Rights in Leveraged Loan Syndicates," Working Papers 19-41, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:19-41
    DOI: 10.21799/frbp.wp.2019.41
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    Cited by:

    1. Michael R. Roberts & Michael Schwert, 2020. "Interest Rates and the Design of Financial Contracts," NBER Working Papers 27195, National Bureau of Economic Research, Inc.
    2. Gabriel Chodorow‐Reich & Antonio Falato, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," Journal of Finance, American Finance Association, vol. 77(1), pages 85-128, February.
    3. Sergey Chernenko & Isil Erel & Robert Prilmeier, 2019. "Why Do Firms Borrow Directly from Nonbanks?," NBER Working Papers 26458, National Bureau of Economic Research, Inc.
    4. Haotian Xiang, 2019. "Time Inconsistency and Financial Covenants," 2019 Meeting Papers 63, Society for Economic Dynamics.
    5. Amir Kermani & Yueran Ma, 2020. "Two Tales of Debt," NBER Working Papers 27641, National Bureau of Economic Research, Inc.
    6. Victoria Ivashina & Boris Vallee, 2020. "Weak Credit Covenants," NBER Working Papers 27316, National Bureau of Economic Research, Inc.
    7. Isil Erel & Jack Liebersohn, 2020. "Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program," NBER Working Papers 27659, National Bureau of Economic Research, Inc.
    8. Robert Prilmeier & René M. Stulz, 2019. "Securities Laws, Bank Monitoring, and the Choice Between Cov-lite Loans and Bonds for Highly Levered," NBER Working Papers 25467, National Bureau of Economic Research, Inc.
    9. Beyhaghi, Mehdi & Nguyen, Ca & Wald, John K., 2019. "Institutional investors and loan dynamics: Evidence from loan renegotiations," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 482-505.
    10. Bushman, Robert & Gao, Janet & Martin, Xiumin & Pacelli, Joseph, 2021. "The influence of loan officers on loan contract design and performance," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    11. Ersahin, Nuri & Irani, Rustom M. & Le, Hanh, 2021. "Creditor control rights and resource allocation within firms," Journal of Financial Economics, Elsevier, vol. 139(1), pages 186-208.

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    More about this item

    Keywords

    covenant; cov-lite; institutional loans; control rights; credit agreements;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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