Macroeconomic Factors in Private Bank Debt Renegotiation

Despite the importance of renegotiation in affecting loan terms of bank debt, little work has been done investigating factors influencing renegotiation of privately placed debt. We find that renegotiation is more likely to occur in good economic times as measured by lower unemployment, lower public credit spreads, and outside of economic recessions. Moreover, renegotiated loan terms are more favorable for the borrower in business cycle upswings. Changes to debt covenants are very weakly correlated with the broader economy, suggesting that covenant amendments may be more driven by discovery of firm-specific information. Finally, we find that a healthier commercial banking sector not only significantly increases the probability of renegotiation, but also leads to more favorable terms for the borrower.