What drives the dynamics of bank debt renegotiation in Europe?A survival analysis approach

Christophe J. Godlewski

UHA & EM Strasbourg (LaRGE Research Center)

6th IFABS Conference 2014, Lisbon

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Take away

• Determinants of bank loan renegotiation dynamics• Initial loan contract, lenders, amendments, country

characteristics• 1.600 loan amendments (1999-2011)• Cross-country sample: 28 European countries• Survival analysis using stratified Cox-type hazard model• Median duration b/w renegotiations = 1 year• Frequently amended contracts renegotiated every 5

months• Role of complexity, informational frictions, economic

uncertainty, legal protection

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Background

• Contracting parties unable / unwilling to commit to initial contract = > debt renegotiation

• When unanticipated / non-contractible state of the world occurs• Restrictiveness of initial loan contract• Changing initial loan terms => mutual gain for both parties

• Renegotiation Signaling game => influence lender Bargaining power (borrower: + shock / + credit quality) Reputation device (lender perspective) Influence borrower incentives (opportunism) Costly (fees, time, effort, coordination…)

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Background (cont.)

• Theoretical evidence (Hart & Moore 1988 … Garleanu & Zwiebel2009) Contract renegotiation has profound impact on security

design, incentives & welfare Can enhance contract efficiency

• Empirical evidence (Roberts & Sufi 2009, Roberts 2012, Nikolaev 2013) Credit agreements renegotiated often & early Large changes to initial loan characteristics Arrival of new information triggers renegotiation Uncertainty, information frictions, agency conflicts... affect

scope for renegotiation Lenders learn of the borrower quality => improve contract

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Empirical design | Data

• Bloomberg Professional Terminal Server• Loan amendments (date + details of amended terms)• Loan characteristics at origination (size, maturity, covenants,

collateral, type, purpose…)• Banking pool (lenders, syndication, lead banks)• Country variables from GFDD + Djankov et al. (2007)• Creditor rights, legal origin, financial development (credit, bond,

stock markets)• 1.600 amendments – 669 companies• 28 countries (DE + ES + FR + LU + NL + UK = 70% of sample)• Time span: 1/1/1999-30/6/2011

[Descriptive statistics: see Fig. 1 + Tab. 1, 2, 3]

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Empirical design | Data (cont.)

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Empirical design | Methodology

• Multiple-failure (or survival) data• Conditional risk set model by Prentice et al. (1981)• Stratified Cox-type model (hazard function shape depends on

number of preceding events)• Assume subject (loan) is not at risk of second event

(renegotiation) until the first has occurred• Assume event dependence (renegotiations are related)• Two variations w/r clock time

• Elapsed time (time measured from entry date) [1]• Gap time (time measured from previous event) [2]

[Numerical illustration in appendix A]

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𝜆 𝑡 𝐹𝑡− = 𝜆0𝑘 𝑡 𝑒𝛽𝑘′𝑍(𝑡) (1)

𝜆 𝑡 𝐹𝑡− = 𝜆0𝑘 𝑡 − 𝑡𝑘−1 𝑒𝛽𝑘′𝑍(𝑡) (2)

Counter = 1

Duration = 13.8

Counter = 2

Duration = 15.8

Counter = 3

Duration = 4.3

Gap time = 15.8

T start = 0

T stop = 13.8

T start = 13.8

T stop = 29.6

T start = 29.6

T stop = 33.9

Elapsed time = 29.6

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Empirical design | Methodology – num. ex.

Empirical design – survival & hazard

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Results

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Variable Mean Std. Dev.

Duration (months) 19.19 20.14Amendment types by renegotiation 1.88 1.30Amendment types by loan 2.53 1.42Renegotiation / maturity (%) 0.41 0.39Difference in maturity (years) 1.61 4.17

Difference in amounts (%) 0.13 2.66

Facility amount (mln $) 1 191.82 3 010.56

Maturity (years) 6.36 3.34

Spread (bps) 223.59 182.72

Syndication (%) 0.83 0.38

Secured (%) 0.60 0.49

Covenants (%) 0.40 0.49

Lenders 13.78 17.30

Leaders (%) 0.50 0.38

Results (cont.)

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N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%)

Elapsed time Gap time

Variable / Model (1.1) (2.1) (3.1) (4.1) (1.2) (2.2) (3.2) (4.2)

Facility amount 0.93 0.92 0.97 0.90 0.81 0.82 0.90 0.91

Maturity 0.86 0.87 0.23 0.18 0.85 0.87 0.53 0.45

Syndication 0.07 0.05 0.03 0.05 0.09 0.05 0.03 0.04

Leaders 23.72 21.80 16.19 22.17 13.88 20.81 6.90 28.64

∆ Facility amount 7.41 10.64 1.31 1.56 2.70 0.34

∆ Maturity 0.84 0.79 0.85 0.30 0.19 0.25

∆ Outstanding amount 1.52 7.43 5.90 0.31 0.69 0.30

∆ Definition 3.41 3.09 2.72 1.07 0.88 1.03

Amendment types by loan 2.67 2.96 2.87 2.58

Amendments by borrower 0.82 0.84 0.79 0.93

Renegotiation / Maturity 0.00 0.00 0.00 0.00

French legal origin 11.05 11.08

Results (cont.)

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N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%)

Elapsed time Gap time

Variable / Model (4.1a) (4.1b) (4.1c) (4.1d) (4.2a) (4.2b) (4.2c) (4.2d)

Crisis 0.02 0.01 0.01 0.02 0.05 0.08 0.19 0.04

Same region 1.02* 1.04

Same EU member 1.02* 1.02

Same EZ member 0.96 0.97

Coefficients of other variables remain similarNotable exception for financial development variables (significant & HR > 1)

Discussion

• Design & efficiency of loan contracts• Determinants of debt contract renegotiation dynamics in

Europe• Multiple failure-time date with repeated & ordered events• ¼ renegotiations are multiple• Large changes initial loan terms: +25% to maturity; +13% to

amount• Median duration b/w renegotiations = 1 year• Frequently amended contracts renegotiatied every 5 months• Contract complexity + information frictions + uncertainty +

legislation = major role in shaping bank loan contracts over time

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