Debt renegotiation and the design of financial contracts

This is a follow-up of my previous post on debt renegotiation and financial contracting and  design.

Here is another graph to dig deeper into (re)designing of financial contracts following renegotation:


The figure above shows the renegotiation packages composition in details (European credit market, 1999 to 2014).

Each bar shows the percentage of renegotiations involving a particular package of amendments to different loan characteristics. Distinct packages can involve amending up to six different loan characteristics, according to the following ordering: Maturity, Definition, Financial covenants, Non-financial covenants, Pricing, Amount. 1 means that a particular characteristic of the loan was amended (0 otherwise).

For instance, around 20% of the renegotiations involve amendment to the loan amount (000001), while in around 14% of the cases the maturity and the amount are amended (100001).

So what do we see? First, great heterogeneity in renegotiation packages. Second, and more important, that 5 packages account for most of renegotiations in Europe: amendment to Amount only, amendments to Maturity and Amount, amendment to Maturity only, and two packages involving a non material amendment: Definition only and Definition & Amount. Hence, a vast majority of amendments change up to 2 loan characteristics only, and usually these are the major ones, like Amount or Maturity.

What are the determinants of these packages’ design? Slowly but surely a first draft of my paper should come out with tentative empirical answers to this important question.


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