Structure and Determinants of Financial Covenants in Leveraged Buyouts

We use a proprietary dataset to explore (i) the financial covenant structure and (ii) the determinants of their restrictiveness in leveraged buyouts. With respect to (i) we find that the covenant structure is more standardized in sponsored than in non-sponsored loans: the former show less variation in the included types and combinations of covenants and include more financial covenants than the latter. With respect to (ii) we measure financial covenant restrictiveness precisely as the distance between threshold and financial forecast. We show that two competing mechanisms, reduced information asymmetry costs and increased financial risk, affect the restrictiveness in sponsored loans.