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Debt Flexibility

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Abstract

This paper documents new facts on the modification of bank loans using FR Y-14Q regulatory data on C&I loans. We find that loan-level modifications of key contractual terms, such as interest and maturity, occur at least once for 41% of loans. Cross sectional differences in modifications are substantial and amplified by borrower distress. Relative to single-lender loans, syndicated loans are 1.5 times more likely to be modified and interest rate changes are twice as likely. Our findings call into question whether 1) creditor dispersion makes loan modifications more challenging and 2) relationship lending between banks and small borrowers creates more scope for flexibility when borrower-level conditions change.

Suggested Citation

  • Rhys M. Bidder & Nicolas Crouzet & Margaret M. Jacobson & Michael Siemer, 2023. "Debt Flexibility," Finance and Economics Discussion Series 2023-076, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2023-76
    DOI: 10.17016/FEDS.2023.076
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    References listed on IDEAS

    as
    1. Hongda Zhong, 2021. "A Dynamic Model of Optimal Creditor Dispersion," Journal of Finance, American Finance Association, vol. 76(1), pages 267-316, February.
    2. Brian S. Chen & Samuel G. Hanson & Jeremy C. Stein, 2017. "The Decline of Big-Bank Lending to Small Business: Dynamic Impacts on Local Credit and Labor Markets," NBER Working Papers 23843, National Bureau of Economic Research, Inc.
    3. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    4. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    5. Zhong, Hongda, 2021. "A dynamic model of optimal creditor dispersion," LSE Research Online Documents on Economics 106646, London School of Economics and Political Science, LSE Library.
    6. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 841-879.
    7. Gabriel Chodorow‐Reich & Antonio Falato, 2022. "The Loan Covenant Channel: How Bank Health Transmits to the Real Economy," Journal of Finance, American Finance Association, vol. 77(1), pages 85-128, February.
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    More about this item

    Keywords

    Corporate debt; Renegotiation; SME lending; Relationship lending;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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