The development of contingency clauses: appraisal and implications for financial stability
The sustained growth in corporate debt over the past decade has led to an increasingly widespread use of contingency clauses. These clauses, also known as “triggers”, are written into bond issue contracts or bank loan agreements, and aim to facilitate borrowers’ access to financing by offering a certain degree of protection to creditors. They result in a tightening of the company’s borrowing conditions (for example an increment in the coupon or an early repayment), should its financial situation deteriorate. These clauses may have significant effects on the functioning of financial markets. First, because they complicate both credit risk analysis and the valuation process of debt securities with such triggers embedded. Second, because they complicate credit rating agencies’ task of rating debt-security issuers. And lastly, because their triggering could result in the opposite effect to that sought, that is to say, instead of protecting the creditor, they may cause a sharp deterioration in the borrower’s financial position. At the same time, they may also result in a series of destabilising effects for financial markets, exacerbated by the fact that investors are often unaware of their existence. While these clauses must be used with caution by borrowers, adequate transparency is also essential so that rating agencies, analysts and investors might fully understand their potential effects.
Volume (Year): (2002)
Issue (Month): 1 (November)
|Contact details of provider:|| Postal: |
Web page: http://www.banque-france.fr/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:bfr:fisrev:2002:1:4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.