Initial Conditions and the Private Debt Renegotiation Process

Abstract

I investigate whether and how initial conditions around loan origination influence private debt renegotiation process. I model the renegotiation likelihood, and the conditional probability of multiple renegotiation rounds or multiple amended terms using a sequential logit model. I use a large sample of 15,000 loans on the European credit market. I find that contractual (covenants and collateral) and organizational (lenders pool size, reputation and relationship) mechanisms mitigating adverse selection and moral hazard risks have the largest and positive economic impacts. Lenders financial conditions (capitalization and credit portfolio exposure) and institutional arrangement aiming at creditors protection significantly impact the renegotiation process.

The role of debt renegotiation in mitigating risk-shifting incentives

“…Figure 4.3 shows the distribution of renegotiation rounds. Clear from the figure is that first to fifth renegotiation rounds are the most likely to occur, an observation which is in accordance with Roberts (2015) and Godlewski (2017).…”

“…This data set contains detailed information about the type of amended loan terms, the number of amended loan terms and the number of renegotia tion rounds. Following Godlewski (2015aGodlewski ( , 2017Godlewski ( , 2019 we aggregate types of amended loan terms into eight categories, namely, the amount, maturity, pric ing, definition, covenants financial, covenants nonfinancial, issue status and loan collateral. We then extract all loans 6 to U.S. borrowers with effective dates over the same period.…”

“…After the 2008 global financial crisis, the rise of private equity firms in the distressed debt sector and the rapid expansion in the level of distressed debt have revealed the importance of studying debt restructuring mechanisms in situations of financial distress; thus, making debt renegotiation a central topic of interest to both researchers and practitioners. Empirical studies demonstrate that private reorganization of firms in default is quite often successful (Gilson et al, 1990; Roberts and Sufi, 2009; Denis and Wang, 2014; Godlewski 2014, 2015a, 2015b, 2017, 2019; Roberts, 2015. Gilson et al (1990), test 169 publicly traded firms and find that about half of them, successfully restructured their debt through private workouts.…”

The Effects of Bank Loan Renegotiation on Corporate Policies and Performance

“…I rely on previous work, notably by Roberts and Sufi (2009) and Godlewski (2017), for explanatory variables in equation 2and use loan, lenders, and firm characteristics. I consider loan amount, maturity, covenants, collateral and previous loan issuance, and the number of lenders, the concentration of retained loan shares, the lead lender retained loan share, and the existence of a previous relationship.…”