Agree to Disagree: Lender Equity Holdings, Within-Syndicate Conflicts, and Covenant Design

47 Pages Posted: 31 Aug 2020 Last revised: 9 Nov 2023

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Luca X. Lin

HEC Montreal - Department of Finance

Zhanbing Xiao

Harvard University

Date Written: November 8, 2023

Abstract

Lenders' simultaneous equity holdings introduce conflicts of interest among members of syndicated loans. We argue that lenders address such within-syndicate conflicts with financial covenant design to improve contracting efficiency. We show that loans with higher conflicts rely less on performance-based covenants, which serve as tripwires to facilitate ex-post control transfer and require coordination among syndicate members. Instead, high-conflict loans rely more on capital-based covenants to align shareholder-creditor interest ex-ante and incentivize shareholder monitoring. Overall, these results suggest that such conflicts can reduce capital flexibility and renegotiation efficiency for the borrowers.

Keywords: Within-Syndicate Conflict, Syndicated Loan, Dual Holders, Loan Covenants

JEL Classification: G23, G32, G34

Suggested Citation

Chu, Yongqiang and Lin, Luca Xianran and Xiao, Zhanbing, Agree to Disagree: Lender Equity Holdings, Within-Syndicate Conflicts, and Covenant Design (November 8, 2023). Journal of Financial Intermediation, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3658451 or http://dx.doi.org/10.2139/ssrn.3658451

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Zhanbing Xiao

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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