Foreign bank branch participation and U.S. syndicated loan contract design

Abstract

I examine whether and how foreign bank branch participation in U.S. loan syndicates influences loan contract design. I predict that foreign bank branches’ dollar funding liquidity risk and information frictions increase renegotiation costs and affect loan contract design. I find that loan contracts with greater foreign bank branch participation include fewer flexibility-reducing covenants, such as capital expenditure and balance sheet covenants, that restrict borrowers from making positive net present value investments. I document similar results using matched sample and plausibly exogenous variation in foreign bank branch participation. Additionally, loan contracts with greater foreign bank branch participation are more likely to feature split control rights, which give banks in revolving lines of credit the exclusive right to renegotiate. In contrast, foreign bank branches are more likely to be included in covenant-lite term loans. Overall, I show that foreign bank branch participation affects U.S. syndicated loan contract design through renegotiation costs.