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- 2022
- Working Paper
High-Yield Debt Covenants and Their Real Effects
By: Falk Bräuning, Victoria Ivashina and Ali Ozdagli
High-yield debt including leveraged loans is characterized by incurrence financial covenants, or “cov-lite” provisions. A traditional loan agreement includes maintenance covenants, which require continuous compliance with the covenant threshold, and their violation... View Details
Bräuning, Falk, Victoria Ivashina, and Ali Ozdagli. "High-Yield Debt Covenants and Their Real Effects." NBER Working Paper Series, No. 29888, March 2022.
- Forthcoming
- Article
Weak Credit Covenants
By: Victoria Ivashina and Boris Vallée
Using novel data on 1,240 credit agreements, we investigate sources of contractual complexity in the leveraged loan market. While negative covenants are widespread, carve-out
and deductible clauses that qualify them are as frequent. We propose simple and comprehensive... View Details
Keywords: Leveraged Loans; Loan Contracts; Debt Covenants; Carve-out; Creditor Governance; LBO; Credit; Agreements and Arrangements; Leveraged Buyouts
Ivashina, Victoria, and Boris Vallée. "Weak Credit Covenants." Management Science (forthcoming). (Pre-published online April 15, 2025.)
- 26 Jun 2020
- Working Paper Summaries
Weak Credit Covenants
- 2014
- Working Paper
Further Evidence on Consequences of Debt Covenant Violations
By: Yu Gao, Mozaffar N. Khan and Liang Tan
We present new evidence on debt covenant violation (DCV) consequences that have not previously been examined in the literature. In particular, we show that a DCV triggers significant information asymmetry and uncertainty on the part of shareholders and auditors as... View Details
Keywords: Accounting
Gao, Yu, Mozaffar N. Khan, and Liang Tan. "Further Evidence on Consequences of Debt Covenant Violations." Working Paper, July 2014. (Conditionally accepted, Contemporary Accounting Research.)
- January 1990
- Article
Effectiveness of Accounting-Based Dividend Covenants
By: Paul M. Healy and Krishna G. Palepu
Healy, Paul M., and Krishna G. Palepu. "Effectiveness of Accounting-Based Dividend Covenants." Journal of Accounting & Economics 12, nos. 1-3 (January 1990): 97–124.
- 12 Jan 2017
- News
Bond Covenants and Skeptic Skepticism
- 20 Aug 2024
- News
Evolving Leveraged Loan Covenants May Pose Novel Transmission Risk
- August 2008 (Revised May 2009)
- Background Note
Note on Trade Secrets and Covenants not to Compete: Comparison of Law in the United States and the European Union
By: Robert C. Pozen and Megan Barbero
This note details the use and treatment of Covenants not to Compete in the United States, United Kingdom and France to compete or trade secrets versus patents as alternative ways to protect a business' intellectual property. View Details
Pozen, Robert C., and Megan Barbero. "Note on Trade Secrets and Covenants not to Compete: Comparison of Law in the United States and the European Union." Harvard Business School Background Note 309-024, August 2008. (Revised May 2009.)
- April–May 2021
- Article
The Influence of Loan Officers on Loan Contract Design and Performance
By: Robert Bushman, Janet Gao, Xiumin Martin and Joseph Pacelli
We investigate the extent to which loan officers generate independent, individual effects on the design and performance of syndicated loans. We construct a large database containing the identities of loan officers involved in structuring syndicated loan deals, allowing... View Details
Keywords: Loan Officers; Covenants; Interest Spreads; Syndicated Loans; Banks and Banking; Financing and Loans; Design; Performance
Bushman, Robert, Janet Gao, Xiumin Martin, and Joseph Pacelli. "The Influence of Loan Officers on Loan Contract Design and Performance." Journal of Accounting & Economics 71, nos. 2-3 (April–May 2021).
- 2018
- Working Paper
Corporate Refinancing, Covenants, and the Agency Cost of Debt
By: Daniel Green
How valuable are restrictive debt covenants in reducing the agency costs of debt? I exploit the revealed preference decision to refinance fixed-coupon bonds, which weighs observable interest rate savings against the unobservable costs of a change in restrictive... View Details
Keywords: Covenants; Refinancing; Corporate Bonds; Agency Costs; Debt Policy; Borrowing and Debt; Bonds; Interest Rates
Green, Daniel. "Corporate Refinancing, Covenants, and the Agency Cost of Debt." Working Paper, 2018. (Revise and Resubmit, Journal of Finance.)
- June 2017
- Article
Is Operating Flexibility Harmful under Debt?
By: Nikolaos Trichakis, Dan A. Iancu and Gerry Tsoukalas
We study the inefficiencies stemming from a firm's operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than a third of the firm's... View Details
Keywords: Covenants; Risk-shifting; Inventory; Agency Costs; Debt Financing; Risk Management; Borrowing and Debt
Trichakis, Nikolaos, Dan A. Iancu, and Gerry Tsoukalas. "Is Operating Flexibility Harmful under Debt?" Management Science 63, no. 6 (June 2017): 1730–1761.
- 2024
- Working Paper
Transitory and Permanent Cash Flow Shocks in Debt Contract Design
By: Le Ma, Anywhere Sikochi and Yajun Xiao
We examine how lenders design contracts to account for transitory and permanent cash flow shocks facing borrowers. We find that volatile transitory cash flow shocks are associated with fewer liquidity covenants, indicating financial flexibility that enables firms to... View Details
Keywords: Debt Covenants; Cash Flow Shocks; Debt Contracting; Likelihood Of Default; Cash Flow; System Shocks
Ma, Le, Anywhere Sikochi, and Yajun Xiao. "Transitory and Permanent Cash Flow Shocks in Debt Contract Design." Harvard Business School Working Paper, No. 22-026, October 2021. (Revised February 2024. Journal of Financial and Quantitative Analysis, Conditional Accept.)
- Forthcoming
- Article
Transitory and Permanent Cash Flow Shocks in Debt Contract Design
By: Le Ma, Anywhere Sikochi and Yajun Xiao
We examine how lenders design contracts to account for transitory and permanent cash flow shocks facing borrowers. We find that volatile transitory cash flow shocks are associated with fewer liquidity covenants, indicating financial flexibility that enables firms to... View Details
Keywords: Debt Covenants; Cash Flow Shocks; Debt Contracting; Likelihood Of Default; Cash Flow; System Shocks
Ma, Le, Anywhere Sikochi, and Yajun Xiao. "Transitory and Permanent Cash Flow Shocks in Debt Contract Design." Journal of Financial and Quantitative Analysis (forthcoming). (Pre-published online February 25, 2025.)
- Working Paper
Covenant-Light Contracts and Creditor Coordination
By: Bo Becker and Victoria Ivashina
In 2015, 70% of newly issued leveraged loans had weaker enforcement features, called covenant-light or "cov-lite"; this is nearly a three-time increase in cov-lite issuance compared to a previous peak in 2007. We evaluate whether this development can be attributed to... View Details
Keywords: Credit Cycles; Loan Contracts; Debt Covenants; Contracts; Financing and Loans; Credit; Borrowing and Debt
Becker, Bo, and Victoria Ivashina. "Covenant-Light Contracts and Creditor Coordination." Swedish House of Finance Research Paper, No. 16-09, March 2016.
- September 2016
- Article
Disproportional Control Rights and the Bonding Role of Debt
By: Aiyesha Dey, Valeri Nikolaev and Xue Wang
We examine the governance role of debt in the context of U.S.-based dual class ownership structures. We hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders. We document that dual class... View Details
Keywords: Dual Class; Private Debt; Debt Covenants; Bonding Mechanisms; Ownership Type; Capital Structure; Borrowing and Debt
Dey, Aiyesha, Valeri Nikolaev, and Xue Wang. "Disproportional Control Rights and the Bonding Role of Debt." Management Science 62, no. 9 (September 2016): 2581–2614.
- October 2012
- Case
Harrah's Entertainment
By: Paul A. Gompers, Kristin Mugford and J. Daniel Kim
This case examines the issues of establishing and managing a capital structure for the leveraged buyout of Harrah's Entertainment. View Details
Keywords: Leveraged Buyouts; Debt Markets; Loan Contracts; Covenants; Casinos; Gaming; Private Equity; Entertainment and Recreation Industry; United States
Gompers, Paul A., Kristin Mugford, and J. Daniel Kim. "Harrah's Entertainment." Harvard Business School Case 213-054, October 2012.
- 2010
- Other Unpublished Work
Why Takeover Vulnerability Matters to Debtholders
By: Joan Farre-Mensa
Recent work documents that firms that are more vulnerable to takeover have higher borrowing costs. This paper investigates the reasons behind this stylized fact. My results show that firms with few antitakeover defenses face a higher cost of debt because lenders are... View Details
Keywords: Acquisition; Borrowing and Debt; Cost; Equity; Banks and Banking; Investment Portfolio; Risk Management; Agreements and Arrangements; Business and Shareholder Relations; Conflict and Resolution
Farre-Mensa, Joan. "Why Takeover Vulnerability Matters to Debtholders." 2010.
- Research Summary
Tom's current research interests involve the role of accounting information in contracting, particularly in the setting of accounting based covenants in debt contracts. View Details
Sage Belz
Sage graduated from Covenant College in 2017, where she studied economics. Prior to graduate school, Sage worked as a research analyst at the Brookings Institution, conducting research on monetary policy and financial stability with Drs. Ben Bernanke, Nellie Liang, and... View Details
- September 1992 (Revised March 1997)
- Case
Summit Distributors (A)
By: William J. Bruns Jr. and Amy P. Hutton
Summit Distributors was in danger of violating loan covenants because of slow economic activity and forecasted losses and was faced with a choice. Changing the inventory valuation method from LIFO to FIFO would avoid default but would require higher future income... View Details
Keywords: Taxation; Cost Accounting; Cash Flow; Interest Rates; Economic Systems; Borrowing and Debt; Financial Statements; Valuation; Accounting Audits; Financing and Loans; Accounting Industry; Legal Services Industry
Bruns, William J., Jr., and Amy P. Hutton. "Summit Distributors (A)." Harvard Business School Case 193-053, September 1992. (Revised March 1997.)