Risk Management in the Cross-Section of Debt Contracts

, University of 黑料传送门 

, University of North Carolina

, University of North Carolina

This project seeks to identify differences in the financial contracting process across different loan products. For term loans, funds change hands at initiation. As a result, lenders are primarily concerned with credit risk (probability of default and loss given default). On the other hand, lines of credit (also referred to as revolvers) provide borrowers with the option to draw down funds over the life of the loan. While credit risk is important once funds have been transferred to the borrower, the lender’s liquidity risk—the risk that the lender will not have sufficient funds to fulfill the lending obligations—factors into the contracting process for lines of credit. We seek to identify the characteristics of the contracting process that serve the purpose of assessing and managing liquidity risk. In doing so, we contribute by enhancing the literature’s nascent understanding on the design of covenants for different types of loans and the role of renegotiations in debt contracting.