The role of bond covenants and short-term debt: evidence from Brazil

Silva, Vinicius Augusto Brunassi; Saito, Richard; Barbi, Fernando Carvalhaes

doi:10.1590/s1807-76922013000300006

Cited by 10 publications

(16 citation statements)

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“…Based on the results of this study, the flexible and adaptable structure of debentures (Saito, Sheng, & Bandeira, 2007), together with the possibility of reducing agency conflicts between bondholders and shareholders (Smith & Warner, 1979;Billet, King, & Mauer, 2007), reduce the possibility of bondholders expropriation (Silva, Saito, & Barbi, 2013), attracting the interest of institutional investors to buy such bonds. The effect of the interaction between BPI and the dummy variable, based on the number of automatic maturity clauses, was significant only for debentures indentures that have a large number of such clauses (above the third quartile).…”

Section: Resultsmentioning

confidence: 94%

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Guimarães

Malaquias

2020

BBR

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This paper aims to create a bondholders' protection index (BPI) and to investigate what the influence of this index would be on multimarket funds' allocation in corporate bonds. Understanding this relation is relevant because only about 1.36% of multimarket funds' portfolios correspond to debentures. This study advances the literature by covering a topic little discussed in a Brazilian context, proposing the creation of a BPI, which would be related to the number of automatic maturity clauses, which guarantee immediate payment to bondholders in cases of the rupture of a contract. This research comprised 926 debentures series issued in Brazil from 2009 to 2017, and 1,753 multimarket funds, which allocated some portfolios' percentage in these securities. In creating the BPI, we contemplated 15 restrictive clauses, which the most common correspond to negligent business performance, liquidation, dissolution and bankruptcy, and restrictions related to company structure. Moreover, we examined less common restrictive clauses as well, including indebtedness policy, shares issuance and amortization, and ratings downgrading. Regarding data analysis, we employed multiple linear regression models, with pooled estimators, applying the standard error correction by White's robust matrix (1980). The main results suggest that BPI positively effects multimarket funds' allocation in debentures. Furthermore, this influence is more intense in indentures with higher number of clauses with automatic maturity. Thus, this study contributes to literature about restrictive clauses, since it demonstrates that debentures' flexible and adaptable structure seems to be interesting for the main bondholders in Brazil. KEYWORDS bondholders' protection index, corporate bonds, multimarket funds, risk, corporate financing 1. INTRODUCTION Corporate bonds are fundamental financing instruments for institutional investors (Liu, Dai, & Wang, 2016) and mutual funds are one of the main debentures' subscribers in Brazil (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais [Brazilian Financial and Capital Markets Association], Capital Markets Bulletin, 2018; Paula, Faria Jr., 2012). They seem to be a safe investment option, due to the guarantee of creditors' payment, which involves the amount invested plus interest. However, when companies' managers opt for actions that increase investment risk, it can result in losses for bondholders (Kahan, 1995). Thus, corporate bonds financing leads to agency conflict between shareholders/ managers and bondholders, which reduces firms' value (Saito, Sheng, & Bandeira, 2007). Bondholders generally choose to protect themselves from managers' negligent performance, by means of indentures' restrictive clauses (Nash, Nette, & Poulsen, 2003). This paper aims at creating a bondholders' protection index (BPI) and at investigating what is the influence of this index on multimarket funds allocation in corporate bonds. Covenants are the cheapest way of mitigating potential issues in the relationship between sha...

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Section: Resultsmentioning

confidence: 94%

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Guimarães

Malaquias

2020

BBR

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“…As indicated in Chart 1, the independent variable is BPI. This index was calculated based on Billet, King and Mauer (2007), and Silva, Saito and Barbi (2013) and it also involves restrictive clauses and clauses that indicate what companies need to follow. The advancement of this research is to consider the interaction of BPI with the number of "automatic maturity" clauses available in the debentures' indentures.…”

Section: Variables Of the Studymentioning

confidence: 99%

“…This paper aims at creating a bondholders' protection index (BPI) and at investigating what is the influence of this index on multimarket funds allocation in corporate bonds.Covenants are the cheapest way of mitigating potential issues in the relationship between shareholders and bondholders (Jerzemowska, 2006) and they assure bondholders the early debentures' maturity in circumstances where the rules are not followed (Saito, Sheng, & Bandeira, 2007). In regards to our contribution to the literature, we point out that this paper proposes the creation of a BPI, which includes 15 restrictive clauses, utilizing the works of Billet, King andMauer (2007) andSilva, Saito andBarbi (2013). Moreover, this study shows the interactions of this index with "automatic payment" clauses, which refer to the guarantee of immediate payment for bondholders in cases of the violating of any clauses.Especially in a Brazilian case, BPI is crucial, because the majority of debentures (78%), from 2011 to 2017, were issued without bondholders preferences concerning issuing companies' assets, in other words, they were unsecured corporate bonds (ANBIMA, Capital Markets Bulletin, 2018).Debentures are one of the main assets used by companies for raising funds in the domestic market (Paiva & Savoia, 2009).…”

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confidence: 98%

Untitled

2019

BBR

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This paper aims to create a bondholders' protection index (BPI) and to investigate what the influence of this index would be on multimarket funds' allocation in corporate bonds. Understanding this relation is relevant because only about 1.36% of multimarket funds' portfolios correspond to debentures. This study advances the literature by covering a topic little discussed in a Brazilian context, proposing the creation of a BPI, which would be related to the number of automatic maturity clauses, which guarantee immediate payment to bondholders in cases of the rupture of a contract. This research comprised 926 debentures series issued in Brazil from 2009 to 2017, and 1,753 multimarket funds, which allocated some portfolios' percentage in these securities. In creating the BPI, we contemplated 15 restrictive clauses, which the most common correspond to negligent business performance, liquidation, dissolution and bankruptcy, and restrictions related to company structure. Moreover, we examined less common restrictive clauses as well, including indebtedness policy, shares issuance and amortization, and ratings downgrading. Regarding data analysis, we employed multiple linear regression models, with pooled estimators, applying the standard error correction by White's robust matrix (1980). The main results suggest that BPI positively effects multimarket funds' allocation in debentures. Furthermore, this influence is more intense in indentures with higher number of clauses with automatic maturity. Thus, this study contributes to literature about restrictive clauses, since it demonstrates that debentures' flexible and adaptable structure seems to be interesting for the main bondholders in Brazil. KEYWORDSbondholders' protection index, corporate bonds, multimarket funds, risk, corporate financing INTRODUCTIONCorporate bonds are fundamental financing instruments for institutional investors (Liu, Dai, & Wang, 2016) and mutual funds are one of the main debentures' subscribers in Brazil (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais [Brazilian Financial and Capital Markets Association], Capital Markets Bulletin, 2018;Paula, Faria Jr., 2012). They seem to be a safe investment option, due to the guarantee of creditors' payment, which involves the amount invested plus interest. However, when companies' managers opt for actions that increase investment risk, it can result in losses for bondholders (Kahan, 1995).Thus, corporate bonds financing leads to agency conflict between shareholders/ managers and bondholders, which reduces firms' value (Saito, Sheng, & Bandeira, 2007). Bondholders generally choose to protect themselves from managers' negligent performance, by means of indentures' restrictive clauses (Nash, Nette, & Poulsen, 2003). This paper aims at creating a bondholders' protection index (BPI) and at investigating what is the influence of this index on multimarket funds allocation in corporate bonds.Covenants are the cheapest way of mitigating potential issues in the relationship between sharehold...

show abstract

“…Covenants are the cheapest way of mitigating potential issues in the relationship between shareholders and bondholders (Jerzemowska, 2006) and they assure bondholders the early debentures' maturity in circumstances where the rules are not followed (Saito, Sheng, & Bandeira, 2007). In regards to our contribution to the literature, we point out that this paper proposes the creation of a BPI, which includes 15 restrictive clauses, utilizing the works of Billet, King andMauer (2007) andSilva, Saito andBarbi (2013). Moreover, this study shows the interactions of this index with "automatic payment" clauses, which refer to the guarantee of immediate payment for bondholders in cases of the violating of any clauses.…”

Section: Introductionmentioning

confidence: 98%

Untitled

2020

BBR

View full text Add to dashboard Cite

This paper aims to create a bondholders' protection index (BPI) and to investigate what the influence of this index would be on multimarket funds' allocation in corporate bonds. Understanding this relation is relevant because only about 1.36% of multimarket funds' portfolios correspond to debentures. This study advances the literature by covering a topic little discussed in a Brazilian context, proposing the creation of a BPI, which would be related to the number of automatic maturity clauses, which guarantee immediate payment to bondholders in cases of the rupture of a contract. This research comprised 926 debentures series issued in Brazil from 2009 to 2017, and 1,753 multimarket funds, which allocated some portfolios' percentage in these securities. In creating the BPI, we contemplated 15 restrictive clauses, which the most common correspond to negligent business performance, liquidation, dissolution and bankruptcy, and restrictions related to company structure. Moreover, we examined less common restrictive clauses as well, including indebtedness policy, shares issuance and amortization, and ratings downgrading. Regarding data analysis, we employed multiple linear regression models, with pooled estimators, applying the standard error correction by White's robust matrix (1980). The main results suggest that BPI positively effects multimarket funds' allocation in debentures. Furthermore, this influence is more intense in indentures with higher number of clauses with automatic maturity. Thus, this study contributes to literature about restrictive clauses, since it demonstrates that debentures' flexible and adaptable structure seems to be interesting for the main bondholders in Brazil. KEYWORDSbondholders' protection index, corporate bonds, multimarket funds, risk, corporate financing INTRODUCTIONCorporate bonds are fundamental financing instruments for institutional investors (Liu, Dai, & Wang, 2016) and mutual funds are one of the main debentures' subscribers in Brazil (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais [Brazilian Financial and Capital Markets Association], Capital Markets Bulletin, 2018;Paula, Faria Jr., 2012). They seem to be a safe investment option, due to the guarantee of creditors' payment, which involves the amount invested plus interest. However, when companies' managers opt for actions that increase investment risk, it can result in losses for bondholders (Kahan, 1995).Thus, corporate bonds financing leads to agency conflict between shareholders/ managers and bondholders, which reduces firms' value (Saito, Sheng, & Bandeira, 2007). Bondholders generally choose to protect themselves from managers' negligent performance, by means of indentures' restrictive clauses (Nash, Nette, & Poulsen, 2003). This paper aims at creating a bondholders' protection index (BPI) and at investigating what is the influence of this index on multimarket funds allocation in corporate bonds.Covenants are the cheapest way of mitigating potential issues in the relationship between sharehold...

show abstract

The role of bond covenants and short-term debt: evidence from Brazil

Cited by 10 publications

References 20 publications

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

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