The impact of safety covenants in syndicated loan agreements

Thursday, March 11, 2021 11:00to12:00
Dynamic Games and Applications Seminar

Speaker: Michèle Breton – Professor, Department of Decision Sciences, HEC Montréal, Canada

Michèle Breton

Webinar link
Webinar ID: 962 7774 9870
Passcode: 285404

We propose a stochastic dynamic game model of syndicated loan contract negotiation in the presence of a covenant. The model accounts for the lender's right to punish or tolerate any breach of the covenant, and for the borrower's flexibility in adjusting its investment and risk-taking strategy. We analyze whether and in what states the inclusion of a safety covenant improves the loan value for each player and analyze the strategies used by the players in equilibrium. Our numerical implementation shows that the lender can optimally tolerate some technical default in some states, and that the value of covenants decreases as the borrower's creditworthiness improves.

(Joint work with Tiguéné Nabassaga, HEC Montréal)

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