Change of management restrictions (CMRs) in loan contracts give lenders explicit ex-ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower to retain talent.
International debt contracts can incorporate—at least implicitly—contingencies governing debt reduction. This paper examines a series of debt contracts that allow for the possibility of rescheduling, forgiveness, and rescheduling with forgiveness. The contract with both rescheduling and forgiveness permits a higher credit ceiling than other types of debt contracts, and contains features found in the HIPC and other recent debt reduction initiatives. If an adverse state of nature occurs, some of the debt is forgiven, a portion is rescheduled, and the remainder is repaid. At the same time, the debtor country is a net recipient of new loans.
Using a hand-collected sample of private debt contracts between U.S. publicly traded firms and financial institutions, I examine the role of accounting in the renegotiation of debt contracts following a positive shock to the borrower's credit quality. I find that, following a positive shock to their credit quality, firms with more timely reporting of good news are more likely to renegotiate their loan contracts and they do so sooner than firms with less timely good news reporting. Further, these effects are more pronounced for firms whose positive shocks can be more credibly communicated through financial reporting. My paper contributes to the literature on the role of accounting information in debt contract renegotiations.
When companies need fuel to grow, bonds may be the way to go. Traditional blue-chip firms and dot-com startups alike can use debt strategically as a key financial instrument. The critical challenge, however, is integrating corporate debt into core business strategies and established financial policies. This practical book provides practitioners in every industry with a comprehensive, prudent approach to managing corporate debt obligations. Written by leading experts in the field and drawing from case studies of real companies, Debt Management walks financial professional through the entire decision-making process--from designing debt issues to retiring debt through bond redemptions and bond repurchases, all to meet corporate financial objectives. Unique in its presentation of the issuer's perspective--that is, it looks at debt from the company's viewpoint, and not just the buyer's or underwriter's--this work will be the industry reference on debt management and the corporate financier's desktop consultant for years to come. With insights into how factors such as bond valuation methodologies, derivatives, and tax and regulatory restrictions affect the process, the authors provide practitioners in both the U.S. and international debt markets with the information and tools needed to make smart debt-management decisions. With first-rate thinking in finance, while keeping the complex mathematics to a minimum, this volume will prove as handy as it is indispensable--the essential reference for planning, implementing, and managing corporate debt with discretion and confidence.
The international debt problem has already generated a huge number of publications. Why then another publication? Many publications address macroeconomic implications of the debt problem, others investigate special new financing instruments such as debt equity swaps, others discuss the economic or legal aspects of debt reschedulings. This work of Walter Berger concentrates on the evolution of the financial side of the debt problem. This evolution is fascinating since it reveals a continuous expansion of the financial instruments being used and a surprising change in intercreditor relationships. While in the seventies equal treatment of creditors was not of much concern, this changed dramatically in the eighties. But lately equal treatment turned out to be a strong impediment to the creditors' management of loan portfolios. Hence, inequality of treatment is growing again. This development represents a challenge to everyone who tries to explain legal changes by using economic theory. Another characteristic of Walter Berger's work is that he starts from a broad institutional perspective. Most economists analyze the debt problem by assuming a world where everybody follows the same principles of rationality and optimization. Walter Berger questions this approach by arguing that cultural discrepancies among creditor countries and indebted countries make it difficult to define efficiency by "Western" standards only. Moreover, different cultures create what Berger calls "institutional obfuscation", that is, creditors have substantial difficulties to predict the behavior of differently minded debtors, and vice versa. This lack of information creates a transaction risk for each contracting party.
Examining various methods of debt management used in the US., Handbook of Debt Management, provides a comprehensive analysis of securities offered for sale by municipalities, states, and the federal government. The book covers laws regarding municipal bonds, the economic choice between debt and taxes and the tax-exempt status of municipal bond owners, capital budgeting, including state and local government practices, developing governmental and intergovernmental debt policies, pay-as-you-go with debt financing for capital projects, US Internal Revenue Service regulations on arbitrage in state and local government debt proceeds investment, US treasury auctions, and more.
Private debt markets are characterised by covenant restrictive but renegotiation-flexible debt contracts as financial intermediaries lending in private debt markets have a comparative advantage over investors in public debt markets in offering such contracts. The two research questions investigated in this paper are quot;Whether several borrower-and contract-specific variables determine the restrictiveness of financial covenants in private debt contracts?quot; and quot;Whether several borrower-and contract-specific variables are associated with loan officers decisions to waive technical default on financial covenants?quot; Two behavioural experiments involving loan officers examined these contracting processes in the Australian private debt market. The first experiment examined whether certain variables determine the restrictiveness of financial covenants in private debt contracts. Management reputation and security were found to be associated with the number and tightness of financial covenants, whilst high financial risk was associated with increased tightness, but not the number, of such covenants. The effect of the interaction, management reputation x security, was also significant. The second experiment examined the association between certain variables and the likelihood of loan officers waiving technical default on financial covenants. Low financial risk, security and defaults caused solely by a change in accounting standards were found to be associated with the likelihood of the default being waived. These are the first behavioural experiments examining these debt contracting processes reported in the literature and the paper contributes in several ways. First, the methodology allows comparisons with findings of prior research from a new perspective. Second, the methodology enabled the investigation of the effect of management reputation on the restrictiveness of covenants: an important addition to the literature given its prominence in professional banking writings. Third, the experimental setting facilitated controlling the investment opportunity set when studying the responses to technical default thereby overcoming a limitation of the main prior study in this area (Chen and Wei, 1993).
