Financial Contracting and re-rating experience,the cases of whole make, claw back and other wise ordinary callable bonds (original) (raw)
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1979
Wtth rtsky debt outstandmg, stockholder acttons armed at maxrmtzmg the value of their equtty clatm can result m a reduction in the value of both the firm and its outstandmg bonds. We examme ways m which debt contracts are written to control the confltct between bondholders and stockholders.
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We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory, which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design.
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How to increase the efficiency of bond covenants: a proposal for the Italian corporate market
European Journal of Law and Economics, 2012
JEL codes: G12, K22, G32 Keywords: bond covenants, bondholder's trustee § Corresponding author. Paragraphs 2 and 3 are attributable to Flavio Bazzana, paragraph 4 to Marco Palmieri, while paragraph 1, 5, and 6 was written jointly. We will thanks the participants and the discussant to the II Adeimf congress held in Capri (Italy) in 2008, and to the EFMA annual meeting held in Milan (Italy) in 2009. The usual disclaimer applies.
Information Effects of Bond Rating Changes: The Role of the Rating Prior to the Announcement
This paper shows that studies of announcement effects of bond rating changes should take into account the initial rating. First, we provide theoretical support for different price effects as a non-linear function of the initial credit rating, using a structural, Merton-type model linking the change in default probability to the change in the stock price. Next, we show that this theoretical prediction is verified in the empirical data. We find much stronger stock price effects for bond rating changes for low-rated firms relative to high-rated firms. Accounting for the role of the initial rating explains in large part the puzzling empirical regularity that stock price effects are associated with downgrades but not upgrades. In addition, it eliminates the investment-grade barrier effect reported in previous studies.
Journal of Corporate Finance, 2017
We examine the pricing of restrictive covenants on bond issues before and after the financial crisis. The existing literature in this area uses data from the pre-crisis period. While the results of our analysis using pre-crisis data are entirely consistent with existing literature, there are dramatic differences in the value of restrictive covenants between the two periods. Further, the differences between the coefficients on the control variables document and elucidate the very different bond market dynamics before and after the crisis. Before the financial crisis, we find a statistically significant cost reduction of around 50 basis points for the inclusion of negative pledges and restrictions on sale-and-leaseback activity. In the post-financial crisis period, however, the benefit of these types of covenants evaporates, becoming statistically insignificant. The benefits, for investment grade firms, of restrictions on investment activities survives the financial crisis; the price effect in the pre-crisis period is a statistically significant 60 to 72 basis point (depending on model) reduction in yields, while in the post-crisis period it is a statistically significant 51 to 55 basis point reduction in yields. For non-investment grade firms, we find in the pre-crisis period that the price effect of restrictions on payouts and additional debt are insignificant. After the financial crisis, however, these restrictions lead to a statistically significant 141 to 150 basis point reduction in yields.