Does the renegotiation of financial contracts matter for firm value? Empirical evidence from Europe Christophe J. Godlewski UHA & EM Strasbourg (LaRGE Research Center) BOFIT Seminar, January 2014, Helsinki 1

1.Summary 2.Literature & hypotheses 3.Empirical strategy 4.Results 5.Discussion Outline 2

Summary Stock market reaction to bank loan renegotiation Event study using 465 loan amendments (25 European countries, 01/ /2011) Univariate and multivariate analysis Amendments’ characteristics Loan terms at origination Borrower characteristics Country characteristics Main results Major amendments: maturity and amount Substantial changes: tranche +100 MLN USD; maturity +1.5 years European firm renegotiates less frequently but early in the life of the loan (vs. US) Financial covenants and loan amount renegotiation => CAR +10% ~ 15% Late and frequent renegotiations => CAR < 0 3

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Literature Renegotiation of financial contracts and bank lending certification (in theory) Incomplete contracts framework (Hart and Moore 1998) Shock to firm alters: - allocation of bargaining power b/w borrower and lender - sharing ex post surplus from initial contract Design of financial contracts = allocation of bargaining power Renegotiation = consequence of new information + shift in bargaining power Better informed borrowers yield control rights to less informed lender (Dessein 2005; Garleanu and Zwiebel 2009) Banks efficient in evaluating, screening and monitoring borrowers (Diamond 1984, 1991; Fama 1985) Banks produce private information on borrowers => bank loan announcement = valuable information for the market => certification value (James 1987…) 5

Literature (cont.) Renegotiation of financial contracts (in practice) Consequence of the restrictiveness of the initial contract / costly process Scarce empirical evidence (Roberts and Sufi 2009; Roberts 2012; Nikolaev 2013) Credit agreements frequently amended, early in the life of the loan Large changes in loan terms following new information Renegotiation = modification of contractual constraints (IA) => «complete» / «efficient» contracting over time => signals the accrual of new information => significant AR => decreasing IA in the borrower-lender relationship => positive AR => good / bad schock & good / bad new information => + / - AR => early vs. late & frequent vs. rare amendments => + / - AR 6

Empirical strategy 7

Empirical strategy (cont.) Data Characteristics of bank loan amendments + loan terms at origination from Bloomberg Borrower balance sheet variables + stock prices + market indices from Factset Country variables from Djankov et al. (2007) & Cihak et al. (2012) 393 companies; 465 loan facilities (883 tranches); 25 countries; 1/1/ /6/ % of renegotiations in UK + FR + NL + DE + ES = 61% of sample Other descriptive statistics: see Tab. 2 8

Results 9 Breakdown of loan amendment types + Distribution of renegotiations by borrower and by loan tranche

Results (cont.) 10 Univariate results for loan amendments and terms at origination (significant results at 5% only; pairwise tests using median) Variable mean CAR (-1,1) t-test Covenant Financial *** Definition Change *** Tranche Amount *** Change > 0 in Facility or Tranche ** Change < 0 in Facility or Tranche Many amended tranches ** Few amended tranches Late renegotiation ** Early renegotiation One time renegotiation *** Frequent renegotiations Variable mean CAR (-1,1) t-test Large spread *** Small spread Long maturity *** Short maturity Bilateral loan ** Syndicated or club loan Large loans amount outstanding *** Small loans amount outstanding French legal origin *** Large sales *** Small sales Large debt / assets *** Small debt / assets Large RoA *** Small RoA Large M / B *** Small M / B Always rated *** Never rated **

Results (cont.) 11 Y = CAR (-1,1); X = loan renegotiation + amendment types variables (controls: year + industry + currency) B.1C.1D.1E.1F.1G.1H.1I.1 Change in loan amount > *** (3.1918) Change in maturity > 1 year (2.4687) Renegotiations by borrower *** *** (1.0402)(1.1530) Number of tranches by borrower *** (0.2210)(0.2515) Types of amendments by tranche *** ** (0.6097)(0.6318) Duration until renegotiation *** ** (0.0013) Duration between renegotiations (0.0820) Obs Adj. R² Significant amendment types: Covenants (fin. & non fin.) + Definition + Fee + Tranche

Results (cont.) 12 Y = CAR (-1,1); X = loan renegotiation + loan terms at origination variables (controls: amendment type + year + industry + currency) B.2C.2D.2E.2F.2G.2H.2I.2 Change in loan amount > ** (5.6545) Change in maturity > 1 year (4.0013) Renegotiations by borrower *** *** (1.2768)(1.3848) Number of tranches by borrower *** (0.3527)(0.4004) Types of amendments by tranche *** *** (0.6405)(0.6165) Duration until renegotiation *** *** (0.0019)(0.0018) Duration between renegotiations0.0175** (0.0072) Obs Adj. R² Significant loan terms at origination: Multiple tranches + Covenants + Past loan issues

Results (cont.) 13 Y = CAR (-1,1); X = loan renegotiation + loan terms at origination + country variables (controls: amendment type + year + industry + currency) B.3C.3D.3E.3F.3G.3H.3I.3 Change in loan amount > ** (6.2981) Change in maturity > 1 year (3.8103) Renegotiations by borrower *** *** (1.3649)(1.4257) Number of tranches by borrower *** (0.3665)(0.4246) Types of amendments by tranche *** *** (0.6647)(0.6580) Duration until renegotiation *** *** (0.0023)(0.0022) Duration between renegotiations0.0191** (0.0080) Corporate bonds0.4597*0.2163* * (0.2557)(0.1098)(0.0884)(0.0898)(0.0884)(0.0919)(0.2412)(0.0935) Private credit ** * * ** ** *** (0.1218)(0.0807)(0.0494)(0.0480)(0.0503)(0.0508)(0.1164)(0.0550) Obs Adj. R²

Results (cont.) 14 Y = CAR (-1,1); X = loan renegotiation + borrower variables (controls: amendment type + year + industry + currency) D.4E.4F.4G.4H.4I.4 Renegotiations by borrower (1.6367)(1.6882) Number of tranches by borrower0.8955**1.0337** (0.3976)(0.5132) Types of amendments by tranche (0.8708)(1.0882) Duration until renegotiation ** (0.0019)(0.0020) Duration between renegotiations (0.0344) log(Sales) (0.6021)(0.6071)(0.6405)(0.6018)(1.9010)(0.6572) Debt / Assets0.2512***0.2706***0.2702***0.2327***0.6032**0.2494*** (0.0555)(0.0567)(0.0660)(0.0532)(0.2976)(0.0645) RoA0.1806***0.1951***0.1922***0.1622*** *** (0.0577)(0.0596)(0.0666)(0.0561)(0.1242)(0.0650) Market to Book *0.1447*0.1873** ** (0.0844)(0.0820)(0.0854)(0.0852)(0.3346)(0.0855) Obs Adj. R²

Results (cont.) Sensitivity analysis Global financial crisis (renegotiations after 09/2008) Excluding UK borrowers Weak creditor rights countries only (< median index : 3) Unique renegotiations Early renegotiation (< median : 2 years) No covenants in initial loan terms Syndicated loans only Overall results remain robust Notable exception for loans without covenants (major ex post monitoring contractual mechanism) 15

Discussion Stock market reaction to bank loan renegotiation European firms renegotiate mostly loan amount, maturity and covenants Renegotiations occur early in the life of the loan; are not frequent Substantial changes in amount and maturity Amendments to financial covenants => CAR +10% to +15% Early and unique renegotiations => CAR > 0 Bilateral loans with short maturity and few tranches => CAR > 0 Renegotiation (re)shapes borrower-lender relationship & contracting Bank loan renegotiation matters for shareholders Renegotiation ~ signal / certification New information + reduction in IA => “better” contracts 16