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Working Paper
Debt Flexibility
How flexible are corporate loans after origination? Theory predicts coordination problems should make syndicated loans harder to modify than single-bank loans. We show the opposite. Using comprehensive regulatory data, we document that syndicated loans are modified frequently and respond to borrower distress, while single-lender loans are half as likely to be modified. This gap is not explained by covenants or performance pricing. Instead, syndicated loans are monitored more intensively. We show theoretically and empirically how fixed monitoring costs generate scale economies: larger loans ...
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Default and Interest Rate Shocks: Renegotiation Matters
We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. Under the standard mechanism, higher interest rates tighten the government’s budget constraint. Under the renegotiation mechanism, higher rates increase lenders’ opportunity cost of holding delinquent debt, which makes lenders accept larger haircuts and makes default more attractive for the government. We argue that our novel renegotiation mechanism reconciles standard sovereign default models with the narrative that the sharp increase in the real ...
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Sovereign Risk Contagion
We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders' pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the ...
Working Paper
Default and Interest Rate Shocks: Renegotiation Matters
We develop a sovereign default model with debt renegotiation in which interest-rate shocks affect default incentives through two mechanisms. The first mechanism, the standard mechanism, depends on how a higher interest rate tightens the government’s budget constraint. The second mechanism, the renegotiation mechanism, depends on how a higher rate increases lenders’ opportunity cost of holding delinquent debt, which makes lenders accept larger haircuts and makes default more attractive for the government. We use the model to study the 1982 Mexican default, which followed a large increase ...
Working Paper
Debt Flexibility
This paper documents new facts on the modification of bank loans using FR Y-14Q regulatory data on C&I loans. We find that loan-level modifications of key contractual terms, such as interest and maturity, occur at least once for 41% of loans. Cross sectional differences in modifications are substantial and amplified by borrower distress. Relative to single-lender loans, syndicated loans are 1.5 times more likely to be modified and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dispersion makes loan modifications more challenging and 2) ...