1. What drives the dynamics of bank debt renegotiation in Europe? A survival analysis approach Christophe J. Godlewski UHA & EM Strasbourg (LaRGE Research Center) 6 th IFABS Conference 2014, Lisbon 1

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3. Take away Determinants of bank loan renegotiation dynamics Initial loan contract, lenders, amendments, country characteristics 1.600 loan amendments (1999-2011) Cross-country sample: 28 European countries Survival analysis using stratified Cox-type hazard model Median duration b/w renegotiations = 1 year Frequently amended contracts renegotiated every 5 months Role of complexity, informational frictions, economic uncertainty, legal protection 3

4. Background Contracting parties unable / unwilling to commit to initial contract = > debt renegotiation When unanticipated / non-contractible state of the world occurs Restrictiveness of initial loan contract Changing initial loan terms => mutual gain for both parties Renegotiation Signaling game => influence lender Bargaining power (borrower: + shock / + credit quality) Reputation device (lender perspective) Influence borrower incentives (opportunism) Costly (fees, time, effort, coordination…) 4 Background | Empirical design | Results | Discussion

5. Background (cont.) Theoretical evidence (Hart & Moore 1988 … Garleanu & Zwiebel 2009) Contract renegotiation has profound impact on security design, incentives & welfare Can enhance contract efficiency Empirical evidence (Roberts & Sufi 2009, Roberts 2012, Nikolaev 2013) Credit agreements renegotiated often & early Large changes to initial loan characteristics Arrival of new information triggers renegotiation Uncertainty, information frictions, agency conflicts... affect scope for renegotiation Lenders learn of the borrower quality => improve contract 5 Background | Empirical design | Results | Discussion

6. Empirical design | Data Bloomberg Professional Terminal Server Loan amendments (date + details of amended terms) Loan characteristics at origination (size, maturity, covenants, collateral, type, purpose…) Banking pool (lenders, syndication, lead banks) Country variables from GFDD + Djankov et al. (2007) Creditor rights, legal origin, financial development (credit, bond, stock markets) 1.600 amendments – 669 companies 28 countries (DE + ES + FR + LU + NL + UK = 70% of sample) Time span: 1/1/1999-30/6/2011 [Descriptive statistics: see Fig. 1 + Tab. 1, 2, 3] 6 Background | Empirical design | Results | Discussion

7. Empirical design | Data (cont.) 7 Background | Empirical design | Results | Discussion

8. Empirical design | Methodology Multiple-failure (or survival) data Conditional risk set model by Prentice et al. (1981) Stratified Cox-type model (hazard function shape depends on number of preceding events) Assume subject (loan) is not at risk of second event (renegotiation) until the first has occurred Assume event dependence (renegotiations are related) Two variations w/r clock time Elapsed time (time measured from entry date) [1] Gap time (time measured from previous event) [2] [Numerical illustration in appendix A] 8 Background | Empirical design | Results | Discussion

9. Counter = 1 Duration = 13.8 Counter = 2 Duration = 15.8 Counter = 3 Duration = 4.3 Gap time = 15.8 T start = 0 T stop = 13.8 T start = 13.8 T stop = 29.6 T start = 29.6 T stop = 33.9 Elapsed time = 29.6 Background | Empirical design | Results | Discussion 9 Empirical design | Methodology – num. ex.

10. Empirical design – survival & hazard 10 Background | Empirical design | Results | Discussion

11. Results 11 Background | Empirical design | Results | Discussion VariableMeanStd. Dev. Duration (months)19.1920.14 Amendment types by renegotiation1.881.30 Amendment types by loan2.531.42 Renegotiation / maturity (%)0.410.39 Difference in maturity (years)1.614.17 Difference in amounts (%)0.132.66 Facility amount (mln $) 1 191.823 010.56 Maturity (years) 6.363.34 Spread (bps) 223.59182.72 Syndication (%) 0.830.38 Secured (%) 0.600.49 Covenants (%) 0.400.49 Lenders 13.7817.30 Leaders (%) 0.500.38

12. Results (cont.) 12 Background | Empirical design | Results | Discussion N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%) Elapsed timeGap time Variable / Model (1.1)(2.1)(3.1)(4.1)(1.2)(2.2)(3.2)(4.2) Facility amount0.930.920.970.900.810.820.900.91 Maturity0.860.870.230.180.850.870.530.45 Syndication0.070.050.030.050.090.050.030.04 Leaders23.7221.8016.1922.1713.8820.816.9028.64 ∆ Facility amount7.4110.641.311.562.700.34 ∆ Maturity0.840.790.850.300.190.25 ∆ Outstanding amount1.527.435.900.310.690.30 ∆ Definition 3.413.092.72 1.070.881.03 Amendment types by loan 2.672.96 2.872.58 Amendments by borrower0.820.840.790.93 Renegotiation / Maturity0.00 French legal origin11.0511.08

13. Results (cont.) 13 Background | Empirical design | Results | Discussion N: 1641-1960 / Hazard ratios / significant variables in bold red (chi² p. val. < 5%) Elapsed timeGap time Variable / Model (4.1a)(4.1b)(4.1c)(4.1d)(4.2a)(4.2b)(4.2c)(4.2d) Crisis0.020.01 0.020.050.080.190.04 Same region1.02*1.04 Same EU member1.02*1.02 Same EZ member0.960.97 Coefficients of other variables remain similar Notable exception for financial development variables (significant & HR > 1)

14. Discussion Design & efficiency of loan contracts Determinants of debt contract renegotiation dynamics in Europe Multiple failure-time date with repeated & ordered events ¼ renegotiations are multiple Large changes initial loan terms: +25% to maturity; +13% to amount Median duration b/w renegotiations = 1 year Frequently amended contracts renegotiatied every 5 months Contract complexity + information frictions + uncertainty + legislation = major role in shaping bank loan contracts over time 14 Background | Empirical design | Results | Discussion