Gregory P Nini

Over the last two decades, the leveraged loan market has grown to a size comparable to the market for high-yield corporate bonds, creating a market for “leveraged finance” that includes about $3 trillion in outstanding debt. For issuers and investors in these markets, high-yield bonds and leveraged loans offer similar but still distinct products to link firms with the providers of debt capital. Because issuers are risky and relatively large, the market is distinct from the investment-grade bond and traditional bank loan markets that serve either very safe borrowers or much smaller borrowers. This distinction has shaped the development of the primary markets, secondary markets, investors, and contracts that govern the relationships between debtors and creditors. We introduce the structure of these markets and review existing academic literature that touches on them and suggest areas that deserve additional research

The Farm Credit System (FCS) is an important source of financing for many rural communities in the United States. As a government-sponsored enterprise (GSE), the FCS has a mandate to provide credit to eligible borrowers. This paper investigates the effect of FCS participation on the supply and pricing of credit to eligible borrowers in the syndicated loan market. We find significant discounts to interest rates on FCS term loans, likely because GSE participation displaces more opportunistic lenders in the syndicate. We further find that FCS credit provision increased during both the Global Financial Crisis of 2007-2009 and recent COVID-19 crash

We examine the impact of creditor control rights on corporate acquisitions. Nearly 75% of loan agreements include restrictions that limit borrower acquisition decisions throughout the life of the contract. Following a financial covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition after violating a financial covenant earn 1.8% higher stock returns, on average, and do not pursue less risky deals. We conclude that creditors use contractual rights and the renegotiation process to limit value-destroying acquisitions driven by managerial agency problems.

Using a novel measure of firms’ expected revenue shortfall at the onset of the pandemic, we study the cross sectional differences in how firms fund cash flow shortfalls. We document a U-shaped pattern, where external capital flows to firms with the largest positive and negative expected cash flow shocks. Firms traditionally considered “financially constrained” raise more - not less - capital (relative to assets), on the margin by issuing equity, while unconstrained firms rely on debt markets. Our findings suggest that external equity plays a crucial role as a financing source for smaller, younger, and otherwise riskier firms in times of stress

We find that corporate loan contracts frequently concentrate control rights with a subset of lenders. Despite the rise in term loans without financial covenants—so-called covenant-lite loans—borrowing firms’ revolving lines of credit almost always retain traditional financial covenants. This split structure gives revolving lenders the exclusive right and ability to monitor and to renegotiate the financial covenants, and we confirm that loans with split control rights are still subject to the discipline of financial covenants. We provide evidence that split control rights are designed to mitigate bargaining frictions that have arisen with the entry of nonbank lenders and became apparent during the financial crisis.

In a large sample of private credit agreements of publicly traded firms, nearly all agreements contain at least a boilerplate provision requiring the borrower to purchase insurance. In about 80 percent of the agreements, the insurance covenant is more explicit. Four additional features of the insurance covenant are quite common: requirements of coverage for specific risks, naming the lender as a loss payee, mandating that any insurance proceeds be used to repay the loan, and explicit permission for the borrower to self-insure. Credit agreements contain more stringent insurance requirements for borrowers that pose higher credit risk. The insurance requirements are strongly positively correlated with the loan being secured by collateral, which suggests that insurance creates value by protecting lenders from unexpected changes in seniority that might happen following the destruction of collateral. Insurance covenants are an important ingredient of credit agreements designed to create a very safe claim for senior, secured lenders.

We trace the evolution of extreme illiquidity discounts among Treasury securities during the financial crisis, when bond prices fell more than 6% below more liquid but otherwise identical notes. Using high-resolution data on market quality and trader identities and characteristics, we find that the discounts amplify through feedback loops, where cheaper, less-liquid securities flowto longer-horizon investors, thereby increasing their illiquidity and thus their appeal to these investors. The effect of the widened liquidity gap on transactions costs is further amplified by a surge in the price liquidity providers charge for access to their balance sheets in the crisis.

The risk of customers affects corporate financial policy by limiting the ability of firms to securitize customer receivables. We find that firms with riskier receivables, based on the credit risk and diversification of the firms' principal customers, have lower financing capacity and lower leverage in their asset-backed securitizations. Because securitizations are designed to create a very safe claim by separating the risk of the securitized assets from the risk of the originating firms, increases in the risk of the receivables directly inhibit originating firms' ability to securitize assets and indirectly inhibit the originating firms' access to external finance. The study highlights a novel link between the financing of supplier firms and the financial health of their customers and shows how an increase in risk can limit access to external capital. •Nonfinancial firms can obtain financing by securitizing their accounts receivable.•Firms with riskier receivables have securitizations that are smaller and less leveraged.•The risk of the originating firm does not limit the size or leverage of the securitization.•Receivables securitizations separate the risk of the originating firm and the securitized assets.•Increases in risk limit the ability of financial engineering to create safe assets.

I examine the implications of the sharp contraction of loan supply from nonbank institutional investors from 2008 through 2010 by comparing firms with and without institutional loans at the onset of the financial crisis. Despite large subsequent reductions in institutional loan balances, there is no evidence that firms with exposure to the supply shock subsequently experienced worse firm performance or lower investment. Instead, there is strong evidence that firms fully offset the fall in institutional loans by issuing additional bank debt and, primarily, corporate bonds. The results show that large borrowers can easily substitute between different types of capital and that institutional loans do not facilitate excessive corporate borrowing

The financial crisis and subsequent recession generated sizable operating losses for life insurance companies, yet the consequences were far less significant than for other financial intermediaries. The ability to quickly generate new capital through external issuance and dividend reductions let life insurers maintain healthy levels of equity capital. We use this experience to examine the causes and consequences of external capital issuance by U.S. life insurance companies. We show that, in general, new capital is issued both to support the growth of new business and to replace capital depleted by operating losses. This second channel is particularly important during macroeconomic recessions. Notably, we do not find any evidence that insurers had difficulty generating new capital, unlike other financial service providers that required large amounts of public support. For life insurers, what changed following the financial crisis was the demand to raise external capital, but the supply of external capital appears to have remained constant.