The Determinants of Contract Terms in Bank Revolving Credit Agreements

Abstract

The paper examines the determinants of contract terms on bank revolving credit agreements (revolvers) of medium/large publicly traded companies. We model the duration (maturity), secured status, and pricing decisions within a simultaneous decision framework, thereby overcoming the biased and inconsistent estimates in prior single equation studies of debt contract terms. We find strong interrelationships between contract terms with significant bi-directional relationships between duration and secured status and between the all-in-spread and commitment fees and a unidirectional relationship from both duration and secured status to all-in-spread. We also illustrate how several single equation studies of contract terms draw incorrect conclusions because of their (inappropriate) assumption that other contract terms and leverage were exogenous. Finally, our results support the hypothesis that the setting of contract terms plays an important role in alleviating contracting problems.