does the renegotiation of financial contracts matter for firm value? empirical evidence from europe...
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Does the renegotiation of financial contracts matter for firm value?Empirical evidence from Europe
Christophe J. GodlewskiUHA & EM Strasbourg (LaRGE Research Center)
BOFIT Seminar, January 2014, Helsinki
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1. Summary
2. Literature & hypotheses
3. Empirical strategy
4. Results
5. Discussion
Outline
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Summary• Stock market reaction to bank loan renegotiation• Event study using 465 loan amendments (25 European countries,
01/1999 - 06/2011)• Univariate and multivariate analysis
• Amendments’ characteristics• Loan terms at origination• Borrower characteristics• Country characteristics
• Main results• Major amendments: maturity and amount• Substantial changes: tranche +100 MLN USD; maturity +1.5 years• European firm renegotiates less frequently but early in the life of the loan
(vs. US)• Financial covenants and loan amount renegotiation => CAR +10% ~ 15%• Late and frequent renegotiations => CAR < 0
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Literature• Renegotiation of financial contracts and bank lending certification (in theory)• Incomplete contracts framework (Hart and Moore 1998)• Shock to firm alters:
- allocation of bargaining power b/w borrower and lender- sharing ex post surplus from initial contract
• Design of financial contracts = allocation of bargaining power• Renegotiation = consequence of new information + shift in bargaining power• Better informed borrowers yield control rights to less informed lender (Dessein
2005; Garleanu and Zwiebel 2009)
• Banks efficient in evaluating, screening and monitoring borrowers (Diamond 1984, 1991; Fama 1985)
• Banks produce private information on borrowers => bank loan announcement = valuable information for the market => certification value (James 1987…)
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Literature (cont.)• Renegotiation of financial contracts (in practice)• Consequence of the restrictiveness of the initial contract / costly
process• Scarce empirical evidence (Roberts and Sufi 2009; Roberts 2012;
Nikolaev 2013)• Credit agreements frequently amended, early in the life of the loan• Large changes in loan terms following new information• Renegotiation = modification of contractual constraints (IA) =>
«complete» / «efficient» contracting over time => signals the accrual of new information => significant AR => decreasing IA in the borrower-lender relationship => positive AR => good / bad schock & good / bad new information => + / - AR => early vs. late & frequent vs. rare amendments => + / - AR
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Empirical strategy• Methodology• Standard event study to compute abnormal returns• Multi-event and multi-country setting• Modified market model (Fuller et al. 2002)• Use local-currency national market indexes (Campbell et al. 2010)• Bank loan renegotiation date = event date (day 0)• Excluding contaminated and clustered events• Compute three-day period CAR (-1,1)• Univariate analysis relies on t-tests• Multivariate analysis relies on OLS (robust s.e. clustered at borrower level) :
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Empirical strategy (cont.)• Data• Characteristics of bank loan amendments + loan terms at origination
from Bloomberg• Borrower balance sheet variables + stock prices + market indices from
Factset• Country variables from Djankov et al. (2007) & Cihak et al. (2012)• 393 companies; 465 loan facilities (883 tranches); 25 countries;
1/1/1999-30/6/2011• 75% of renegotiations in 2009-2010• UK + FR + NL + DE + ES = 61% of sample• Other descriptive statistics: see Tab. 2
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Results
Borrowed Amount Borrowing Base AmountCovenant Financial Covenant Non FinancialDefinition Change Facility AmountLOC Amount Loan FeeMaturity Change Outstanding AmountPrepay Amount Pricing GridTranche Amount
Breakdown of loan amendment types + Distribution of renegotiations by borrower and by loan tranche
1 2 3 4 5 6 70
10
20
30
40
50
60
70
80
90
Renegotiation path counter (by borrower)Renegotiation path counter (by tranche)
Counter
Perc
enta
ge
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Results (cont.)Univariate results for loan amendments and terms at origination (significant results at 5% only; pairwise tests using median)
Variable mean CAR(-1,1) t-test
Covenant Financial 14.3046 2.76***
Definition Change -7.9159 -3.26***
Tranche Amount -7.1887 -2.94***
Change > 0 in Facility or Tranche -0.5911
-2.45**Change < 0 in Facility or Tranche -7.3902
Many amended tranches -3.70792.04**
Few amended tranches 0.0830
Late renegotiation -4.44052.37**
Early renegotiation -0.0515
One time renegotiation 1.07645.14***
Frequent renegotiations -8.9093
Variable mean CAR(-1,1) t-test
Large spread -10.54563.43***
Small spread -0.1510Long maturity -7.2129
5.35***Short maturity 2.5810Bilateral loan 0.0561
2.49**Syndicated or club loan -4.2328Large loans amount outstanding 1.5410
-3.23***Small loans amount outstanding -4.3034French legal origin -3.6546 -3.61***Large sales -5.1315
-2.01***Small sales -13.5308Large debt / assets -1.2658
-3.87***Small debt / assets -17.3421Large RoA -2.7433
-3.10***Small RoA -15.7065Large M / B -0.6148
-2.83***Small M / B -10.2846Always rated -1.9003 -2.79***Never rated -2.1685 -2.06**
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Results (cont.)
Y = CAR (-1,1); X = loan renegotiation + amendment types variables (controls: year + industry + currency)
B.1 C.1 D.1 E.1 F.1 G.1 H.1 I.1Change in loan amount > 0 9.1451***
(3.1918)Change in maturity > 1 year 2.1698
(2.4687)Renegotiations by borrower -4.4498*** -3.5888***
(1.0402) (1.1530)Number of tranches by borrower -0.6035*** 0.0140
(0.2210) (0.2515)Types of amendments by tranche -1.9431*** -1.2764**
(0.6097) (0.6318)Duration until renegotiation -0.0035*** -0.0030**
(0.0013) (0.0013)Duration between renegotiations -0.0189
(0.0820)Obs. 553 339 1367 1354 1354 1367 438 1354Adj. R² 0.1100 0.3010 0.1953 0.1890 0.1938 0.1866 0.4058 0.2010
Significant amendment types: Covenants (fin. & non fin.) + Definition + Fee + Tranche
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Results (cont.)Y = CAR (-1,1); X = loan renegotiation + loan terms at origination variables (controls: amendment type + year + industry + currency)
B.2 C.2 D.2 E.2 F.2 G.2 H.2 I.2Change in loan amount > 0 11.5666**
(5.6545)Change in maturity > 1 year 1.7292
(4.0013)
Renegotiations by borrower -4.6332*** -4.7528***
(1.2768) (1.3848)Number of tranches by borrower -0.0244 1.1290***
(0.3527) (0.4004)
Types of amendments by tranche -2.8164*** -2.9026***
(0.6405) (0.6165)
Duration until renegotiation -0.0079*** -0.0061***
(0.0019) (0.0018)Duration between renegotiations 0.0175**
(0.0072)Obs. 307 216 847 839 839 847 253 839Adj. R² 0.1644 0.3996 0.1984 0.1853 0.2102 0.1976 0.2615 0.2311Significant loan terms at origination: Multiple tranches + Covenants + Past loan issues
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Results (cont.)Y = CAR (-1,1); X = loan renegotiation + loan terms at origination + country variables (controls: amendment type + year + industry + currency)
B.3 C.3 D.3 E.3 F.3 G.3 H.3 I.3Change in loan amount > 0 13.3419**
(6.2981)Change in maturity > 1 year 2.9692
(3.8103)Renegotiations by borrower -5.0783*** -5.2243***
(1.3649) (1.4257)Number of tranches by borrower 0.2146 1.4066***
(0.3665) (0.4246)Types of amendments by tranche -2.9536*** -3.1646***
(0.6647) (0.6580)Duration until renegotiation -0.0095*** -0.0072***
(0.0023) (0.0022)Duration between renegotiations 0.0191**
(0.0080)Corporate bonds 0.4597* 0.2163* 0.0855 0.0812 0.1024 0.1039 -0.3153 0.1587*
(0.2557) (0.1098) (0.0884) (0.0898) (0.0884) (0.0919) (0.2412) (0.0935)Private credit -0.2494** -0.1459* -0.0802 -0.0845* -0.1026** -0.1118** 0.0144 -0.1482***
(0.1218) (0.0807) (0.0494) (0.0480) (0.0503) (0.0508) (0.1164) (0.0550)Obs. 255 186 700 694 694 700 219 694Adj. R² 0.1956 0.4216 0.1947 0.1819 0.2094 0.1963 0.2924 0.2385
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Results (cont.)Y = CAR (-1,1); X = loan renegotiation + borrower variables (controls: amendment type + year + industry + currency)
D.4 E.4 F.4 G.4 H.4 I.4Renegotiations by borrower 0.7929 -0.4738
(1.6367) (1.6882)Number of tranches by borrower 0.8955** 1.0337**
(0.3976) (0.5132)Types of amendments by tranche 0.5304 -0.1853
(0.8708) (1.0882)Duration until renegotiation -0.0043** -0.0043**
(0.0019) (0.0020)Duration between renegotiations -0.0351
(0.0344)log(Sales) -0.6105 -0.6629 -0.7093 -0.4523 2.4792 -0.4650
(0.6021) (0.6071) (0.6405) (0.6018) (1.9010) (0.6572)Debt / Assets 0.2512*** 0.2706*** 0.2702*** 0.2327*** 0.6032** 0.2494***
(0.0555) (0.0567) (0.0660) (0.0532) (0.2976) (0.0645)RoA 0.1806*** 0.1951*** 0.1922*** 0.1622*** 0.0447 0.1747***
(0.0577) (0.0596) (0.0666) (0.0561) (0.1242) (0.0650)Market to Book 0.1346 0.1543* 0.1447* 0.1873** -0.3734 0.2103**
(0.0844) (0.0820) (0.0854) (0.0852) (0.3346) (0.0855)Obs. 335 331 331 335 115 331Adj. R² 0.5574 0.5675 0.5633 0.5625 0.4430 0.5683
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Results (cont.)• Sensitivity analysis• Global financial crisis (renegotiations after 09/2008)• Excluding UK borrowers• Weak creditor rights countries only (< median index : 3)• Unique renegotiations• Early renegotiation (< median : 2 years)• No covenants in initial loan terms• Syndicated loans only
• Overall results remain robust• Notable exception for loans without covenants (major ex post
monitoring contractual mechanism)
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Discussion• Stock market reaction to bank loan renegotiation• European firms renegotiate mostly loan amount, maturity and
covenants• Renegotiations occur early in the life of the loan; are not frequent• Substantial changes in amount and maturity• Amendments to financial covenants => CAR +10% to +15%• Early and unique renegotiations => CAR > 0• Bilateral loans with short maturity and few tranches => CAR > 0• Renegotiation (re)shapes borrower-lender relationship & contracting• Bank loan renegotiation matters for shareholders• Renegotiation ~ signal / certification• New information + reduction in IA => “better” contracts