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Corporate loan securitization and the standardization of financial covenants

Subject

Accounting

Publishing details

Social Sciences Research Network

Authors / Editors

Bozanic Z; Loumioti M; Vasvari F P

Biographies

Publication Year

2016

Abstract

We examine whether syndicated loans securitized through Collateralized Loan Obligations (CLOs) have more standardized financial covenants. We proxy for the standardization of covenants using the textual similarity of their contractual definitions. We find that securitized loans are associated with higher covenant standardization than non-securitized institutional loans. Additionally, we show that CLOs with more diverse or frequently rebalanced portfolios are more likely to purchase loans with standardized covenants, potentially because standardization can alleviate the high information costs in loan monitoring and screening that these CLOs face. We further document that covenant standardization is associated with greater loan and CLO note rating agreement between credit rating agencies, further supporting the relation between lower information costs and covenant standardization. Overall, our study provides evidence that loan securitization is related to the design of standardized financial covenants.

Keywords

Securitization; Standardization; Collateralized Loan Obligations (CLO); Financial Covenants; Syndicated Loans

Series

Social Sciences Research Network