@article {Das92, author = {Sanjiv Ranjan Das and Seoyoung Kim}, title = {Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles}, volume = {26}, number = {4}, pages = {92--112}, year = {2017}, doi = {10.3905/jfi.2017.26.4.092}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The shadow banking system comprises special purpose vehicles (SPVs) characterized by high debt, illiquid long-maturity assets funded predominantly by short-maturity debt, and tranched liabilities, also known as the capital structure of the SPV. These three features lead to an adversarial game among senior-note holders, who solve for an optimal rollover policy based on the other senior tranches with varying rollover dates. This rollover policy is, in turn, taken into account by capital-note holders (i.e., investors in the equity tranche) when choosing the capital structure (i.e., the assets-to-debt ratio) of the SPV. Rollover risk increases in the number of time tranches, resulting in a lower equilibrium level of debt and higher cost of debt. The expected life of the SPV may also be shortened. We propose a covenant-based capital structure that mitigates these problems and is Pareto-improving for equity and debt holders in the SPV.TOPICS: Fixed income and structured finance, volatility measures}, issn = {1059-8596}, URL = {https://jfi.pm-research.com/content/26/4/92}, eprint = {https://jfi.pm-research.com/content/26/4/92.full.pdf}, journal = {The Journal of Fixed Income} }