Center for Advanced Management
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Prof. Boris Vallee (Harvard Business School)

Programm

Datum: 14. März 2019

Zeit: 14.00 - 15.30 Uhr

Ort: Ludwigstraße 28 (VG), 211b

Titel: Weak Credit Covenants

Abstract

Using novel data on 1,240 credit agreements for large corporate loans, we show that while inclusion of negative covenants that restrict new debt issuance, payments, asset sales, affiliate transactions and investments is widespread, clauses that weaken these restrictions are almost as common. We measure the deductibles for the core covenants in terms of their potential impact on overall leverage and show that they are large, and concentrated in already highly levered transactions. We analyze the cross-sectional variation in contractual weaknesses introduced through deductibles and carveouts to negative covenants and show that such contractual provisions are characteristic of leveraged buyouts, and more prevalent when banks have a low skin in the game. An event study on a recent court decision enforcing weakening clauses suggests that such contractual design corresponds to a value transfer from creditors to shareholders.