Non-Fundamental Loan Renegotiations

Abstract

Prior studies predominantly examine fundamental performance-driven explanations of loan renegotiations. We contrast with this work by investigating the improvement in secondary loan market trading conditions as anon-fundamentaldriver of loan renegotiation. Exploiting a regression discontinuity design around the LSTA 100 Index reconstitution, we find that index-included loans are around five times more likely to receive interest-rate–reducing amendments than comparable loans just below the index inclusion threshold. Within-loan-package tests confirm that these renegotiations are not driven by changes in the borrower's fundamental performance. The threat of refinancing likely drives this effect, as the results are more pronounced when such threats are more credible.