Changlun Lin (CL), CFA

The Rise of Loan Renegotiation --Job Market Paper

One striking development in the syndicated loan market is the sharp rise in loan amendments over the past 30 years. Between 1995 and 2024, the share of amendments rose from 5.0% (4.4%) to 72.2% (61.4%) by dollar (deal) volume, particularly in the aftermath of the financial crisis. The rise in loan renegotiation following the financial crisis is mainly driven by heightened institutional demand for leveraged loans. As a result, leveraged firms gained greater bargaining power and secured more borrower-favorable amendments, which appear beneficial to corporate outcomes, as reflected in post-renegotiation investment and cash holding behavior — an unintended consequence, or “positive evil,” of post-crisis financial regulation. (link)

Too Dangerous to Save: Post-Crisis Distressed Firm Loan Renegotiation

Even though distressed firms receive better amendments after the crisis, they are less likely to recover and more likely to go bankrupt than their pre-crisis counterparts. The worse profile of distressed firms overshadows the benefits of borrower-favorable renegotiation. Distressed firms that recovered did so more slowly, and those that went bankrupt did so more quickly after 2010, which is likely due to their worse profile. Favorable amendments did not expedite or delay bankruptcy after 2010, even though more renegotiations delayed bankruptcy after 2010. I developed an abstract model to elucidate further the "Too dangerous to save" phenomenon. I also examine the heterogeneity in the effects of loan renegotiation on distressed firms from both the borrower and lender perspectives. (link)