(Re)designing private debt contracts through renegotiations

Following my papers on the stock market reaction to bank loan renegotiations (here), the determinants of renegotiation rounds (here), and their time dynamics (here ), i am now working on a paper dealing with bank loan renegotiations (again!) with a focus on the (re)designing of debt contracts following amendments. Again i do this on the European credit market.

More precisely i consider why and how the characteristics of the contract ( such as the amount, maturity, covenants…) change following a renegotiation.

One could look at it as “packages” of amendments of different loan terms, e.g. following a renegotiation round, the amount and the maturity are amended (let say both are increased); another loan has its covenants and maturity amended; and so on…

Therefore, the main questions are why amending several loan terms and why do we observe such renegotiation packages?

These are important questions both for academics (for coporate finance, financial intermediation, contract theory…) and practicioners (renegotiations are costly but may improve the “value” of a bank-borrower relationship…).

For the moment i share these (fancy?) graphics:

graph0

The figure above shows the number of loan characteristics that are amended during a renegotiation. In more than 40% of renegotiations only 1 characteristic is amended. Three different characteristics are amended in more than 10% of the cases.graph1

The figure above shows which types of loan characteristics are amended when a renegotiation package involves 1, 2, …, 5, 6 different amended terms. For instance, when only 1 characteristic is amended, it concerns the loan amount in 50% of the cases (upper left “camembert”). Logically, the more different characteristics are amended in a given renegotiation, the more homogenous is their breakdown (subsequent “camemberts”).

More to come…

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