Corporate Loan Securitization and the Standardization of Financial Covenants

• In Event: Financial Institutions and Debt Contracting

Abstract

We apply textual analysis on a large sample of financial covenant definitions to measure covenant standardization and find that securitized corporate loans include more standardized covenants. We document that financial covenant standardization increases the liquidity of securitized loans in the primary and secondary credit market. Consistent with a decrease in illiquidity premiums, covenant standardization decreases the cost of securitized loans without being associated with a lower likelihood of default. We also find that covenant standardization is associated with less disagreement between credit rating agencies, potentially contributing to the higher liquidity of securitized loans. Our findings suggest that financial covenant standardization is positively related to corporate loan securitization and has a significant impact on loan liquidity.

Authors

• Zahn Bozanic, The Ohio State University

• Maria Loumioti, University of Southern California

• Florin Vasvari, London Business School