Macroeconomic Factors in Private Bank Debt Renegotiation
Document Type Working Paper
Despite the importance of renegotiation in affecting loan terms of bank debt, little work has been done investigating factors inﬂuencing renegotiation of privately placed debt. We ﬁnd that renegotiation is more likely to occur in good economic times as measured by lower unemployment, lower public credit spreads, and outside of economic recessions. Moreover, renegotiated loan terms are more favorable for the borrower in business cycle upswings. Changes to debt covenants are very weakly correlated with the broader economy, suggesting that covenant amendments may be more driven by discovery of ﬁrm-speciﬁc information. Finally, we ﬁnd that a healthier commercial banking sector not only signiﬁcantly increases the probability of renegotiation, but also leads to more favorable terms for the borrower.
Date Posted: 16 November 2011