Showing papers by "Victoria Ivashina published in 2016"

Covenant-Light Contracts and Creditor Coordination

Abstract: 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 market overheating, increased borrower demand for cov-lite loans, or a rise in creditor coordination costs. The last hypothesis stems from the increasing involvement of non-bank institutions and, in particular, the rise of mutual fund participation in the leveraged loan market after the financial crisis. Based on the wider syndication, (narrower) skills, and diverse incentives of non-bank institutional lenders, optimal contracts between them and corporate borrowers likely involve fewer monitoring tools and weaker control rights. We evaluate these explanations of cov-lite contract provisions in a large sample of U.S. loans for the 2001-2014 period. Consistent with creditor-driven explanations for cov-lite issuance, we show that cov-lite prices compress as the prevalence of cov-lite rises. Time patterns in cov-lite issuance closely match inflows to institutional lenders, and at a given time, cov-lite loans are, overwhelmingly, those with the highest ownership by structured products and/or mutual funds. The number and share of structured products and mutual funds also impact the propensity toward other contractual features that influence when and how creditors have control. However, these factors are less relevant in explaining the strength of restrictions on indebtedness, liens, payments, or assets sales.

Monetary Policy and Global Banking

Abstract: Multinational banks use their global internal capital market to respond to local shocks. However, what distinguishes global banks is not only their geographical diversification, but also their funding model: the primary source of stable funding for banks is denominated in their domestic currency. When global banks use their global balance sheets to smooth out local shocks, they need to hedge their foreign exchange exposure. In times when there is limited capital to take the other side of the hedging transaction, this will attenuate the use of internal markets to smooth out local shocks. In this context, tightening monetary policy in the lender’s home country can actually reduce pressure on the swap market, making lending abroad more attractive. Using the changes in interest paid on excess reserves by monetary authorities in six major currency areas between 2000 and 2015, we show that multinational banks reduce their reserve holdings and increase their lending abroad in response to a tightening of domestic monetary policy. This result is robust to the inclusion of a narrow set of fixed effects, and holds at the loan level. Consistent with the proposed mechanism, we show that global banks’ cross-border movement of capital is associated with an increase in foreign exchange swapping activity and its rising cost, as manifested in violations of covered interest rate parity.

Pay Now or Pay Later?: The Economics within the Private Equity Partnership

Abstract: The economics of partnerships have been of enduring interest to economists, but many issues regarding intergenerational conflicts and their impact on the continuity of these organizations remain unclear. We examine 717 private equity partnerships, and show that (a) the allocation of fund economics to individual partners is divorced from past success as an investor, being instead critically driven by status as a founder, (b) that the underprovision of carried interest and ownership — and inequality in fund economics more generally — leads to the departures of senior partners, and (c) the departures of senior partners have negative effects on the ability of funds to raise additional capital.

Covenant-light contracts and creditor coordination

Abstract: 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 market overheating, increased borrower demand for cov-lite loans, or a rise in creditor coordination costs. The last hypothesis stems from the increasing involvement of non-bank institutions and, in particular, the rise of mutual fund participation in the leveraged loan market after the financial crisis. Based on the wider syndication, (narrower) skills, and diverse incentives of non-bank institutional lenders, optimal contracts between them and corporate borrowers likely involve fewer monitoring tools and weaker control rights. We evaluate these explanations of cov-lite contract provisions in a large sample of U.S. loans for the 2001–2014 period. Consistent with creditor-driven explanations for cov-lite issuance, we show that cov-lite prices compress as the prevalence of cov-lite rises. Time patterns in cov-lite issuance closely match inflows to institutional lenders, and at a given time, cov-lite loans are, overwhelmingly, those with the highest ownership by structured products and/or mutual funds. The number and share of structured products and mutual funds also impact the propensity toward other contractual features that influence when and how creditors have control. However, these factors are less relevant in explaining the strength of restrictions on indebtedness, liens, payments, or assets sales.