Defeasance of control rights

Bienz, Carsten, Faure-Grimaud, Antoine and Fluck, Zsuzsanna (2011) Defeasance of control rights. Financial Markets Group Discussion Papers (679). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We analyze one frequent clause in bonds, covenant defeasance. Covenant defeasance allows the issuer to remove the bond's covenants by placing the remaining payments with a trustee in escrow to be paid out on schedule. We provide theoretical justification for this option and show empirically that it allows inclusion of more covenants in bond issues. We highlight characteristics that make issuers likely to add a defeasance clause. In line with the model's prediction, the empirical analysis documents 13-24 basis points yield reduction for defeasible bonds - annual saving of about $1m, or $11m over the life of the average bond.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2011 The Authors
Divisions:	Economics
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited:	29 Jun 2023 10:15
Last Modified:	16 Sep 2023 00:02
URI:	http://eprints.lse.ac.uk/id/eprint/119069

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