Corporate Loan Securitization and the Standardization of Financial Covenants

Accounting

Speaker:Florin Vasvari, London Business School
Website: http://faculty.london.edu/fvasvari/
Date: Wednesday 3 June 2015
Time: 14:00
Location: Constatine Leventis

Further details

Using textual analysis we capture the extent of covenant standardization in syndicated

 

loan contracts by measuring the similarity of financial covenant definitions. We

 

document that securitization of syndicated loans by Collateralized Loan Obligations

 

(CLOs) is associated with greater covenant standardization. Consistent with CLO

 

stakeholders’ needs to decrease information acquisition and processing costs through

 

standardization, we find that financial covenant similarity reduces information asymmetry

 

about covenant terms between debt market participants. Specifically, covenant similarity

 

is associated with an increase in the liquidity of securitized loans in the primary and

 

secondary loan markets. In addition, we find that covenant similarity is associated with

 

greater agreement between credit rating agencies.

 

 

Keywords: Securitization, Financial Covenants, Syndicated Loans, Standardization

JEL Classifications: G17, G21, G32, M41

 

 

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