1. 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

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

3. Summary Stock market reaction to bank loan renegotiation Event study using 465 loan amendments (25 European countries, 01/1999 - 06/2011) 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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5. 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

6. 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

7. Empirical strategy 7

8. 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; 1/1/1999-30/6/2011 75% of renegotiations in 2009-2010 UK + FR + NL + DE + ES = 61% of sample Other descriptive statistics: see Tab. 2 8

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

10. 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 Financial14.30462.76*** Definition Change-7.9159-3.26*** Tranche Amount-7.1887-2.94*** Change > 0 in Facility or Tranche -0.5911 -2.45** Change < 0 in Facility or Tranche -7.3902 Many amended tranches-3.7079 2.04** Few amended tranches0.0830 Late renegotiation-4.4405 2.37** Early renegotiation-0.0515 One time renegotiation1.0764 5.14*** Frequent renegotiations-8.9093 Variable mean CAR (-1,1) t-test Large spread-10.5456 3.43*** Small spread-0.1510 Long maturity-7.2129 5.35*** Short maturity2.5810 Bilateral loan0.0561 2.49** Syndicated or club loan-4.2328 Large loans amount outstanding1.5410 -3.23*** Small loans amount outstanding-4.3034 French legal origin-3.6546-3.61*** Large sales-5.1315 -2.01*** Small sales-13.5308 Large debt / assets-1.2658 -3.87*** Small debt / assets-17.3421 Large RoA-2.7433 -3.10*** Small RoA-15.7065 Large M / B-0.6148 -2.83*** Small M / B-10.2846 Always rated-1.9003-2.79*** Never rated-2.1685-2.06**

11. 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 > 09.1451*** (3.1918) Change in maturity > 1 year2.1698 (2.4687) Renegotiations by borrower-4.4498***-3.5888*** (1.0402)(1.1530) Number of tranches by borrower-0.6035***0.0140 (0.2210)(0.2515) Types of amendments by tranche-1.9431***-1.2764** (0.6097)(0.6318) Duration until renegotiation-0.0035***-0.0030** (0.0013) Duration between renegotiations-0.0189 (0.0820) Obs.55333913671354 13674381354 Adj. R²0.11000.30100.19530.18900.19380.18660.40580.2010 Significant amendment types: Covenants (fin. & non fin.) + Definition + Fee + Tranche

12. 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 > 011.5666** (5.6545) Change in maturity > 1 year1.7292 (4.0013) Renegotiations by borrower-4.6332***-4.7528*** (1.2768)(1.3848) Number of tranches by borrower-0.02441.1290*** (0.3527)(0.4004) Types of amendments by tranche-2.8164***-2.9026*** (0.6405)(0.6165) Duration until renegotiation-0.0079***-0.0061*** (0.0019)(0.0018) Duration between renegotiations0.0175** (0.0072) Obs.307216847839 847253839 Adj. R²0.16440.39960.19840.18530.21020.19760.26150.2311 Significant loan terms at origination: Multiple tranches + Covenants + Past loan issues

13. 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 > 013.3419** (6.2981) Change in maturity > 1 year2.9692 (3.8103) Renegotiations by borrower-5.0783***-5.2243*** (1.3649)(1.4257) Number of tranches by borrower0.21461.4066*** (0.3665)(0.4246) Types of amendments by tranche-2.9536***-3.1646*** (0.6647)(0.6580) Duration until renegotiation-0.0095***-0.0072*** (0.0023)(0.0022) Duration between renegotiations0.0191** (0.0080) Corporate bonds0.4597*0.2163*0.08550.08120.10240.1039-0.31530.1587* (0.2557)(0.1098)(0.0884)(0.0898)(0.0884)(0.0919)(0.2412)(0.0935) Private credit-0.2494**-0.1459*-0.0802-0.0845*-0.1026**-0.1118**0.0144-0.1482*** (0.1218)(0.0807)(0.0494)(0.0480)(0.0503)(0.0508)(0.1164)(0.0550) Obs.255186700694 700219694 Adj. R²0.19560.42160.19470.18190.20940.19630.29240.2385

14. 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 borrower0.7929-0.4738 (1.6367)(1.6882) Number of tranches by borrower0.8955**1.0337** (0.3976)(0.5132) Types of amendments by tranche0.5304-0.1853 (0.8708)(1.0882) Duration until renegotiation-0.0043** (0.0019)(0.0020) Duration between renegotiations-0.0351 (0.0344) log(Sales)-0.6105-0.6629-0.7093-0.45232.4792-0.4650 (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***0.04470.1747*** (0.0577)(0.0596)(0.0666)(0.0561)(0.1242)(0.0650) Market to Book0.13460.1543*0.1447*0.1873**-0.37340.2103** (0.0844)(0.0820)(0.0854)(0.0852)(0.3346)(0.0855) Obs.335331 335115331 Adj. R²0.55740.56750.56330.56250.44300.5683

15. 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

16. 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