Seminar: Jefferson Abraham (London Business School)

Research Associate at the Indian School of Business (2016-19), Brand Manager at Godrej Consumer Products Limited (2015-16), Insights & Analytics Manager at L’Oreal India Pvt. Ltd. (2012-15), R&D Engineer at IBM India Pvt. Ltd. (2007-10), degree obtained MBA from Indian Institute of Management Bangalore (2010-12)

Paper: To Cure or not the Cure. The use of Equity Cures in Debt Contracts

Abstract: This paper introduces the first systematic evidence of Equity Cures, a loan contracting
innovation that allows borrowers to remedy financial covenant violations through equity infusions, preventing the transfer of control rights. Motivated by the theory of incomplete contracts, I posit a set of feasibility conditions for the existence of this feature that Private Equity (PE) sponsors uniquely satisfy and find evidence that PE sponsors are the main users of these cure rights. I estimate a 70 basis point ex ante price premium for this feature and document that loan agreements with Equity Cures substitute out capital covenants and contain fewer performance covenants. I examine ex post loan performance to assess the effectiveness of these cure rights and find that they reduce covenant violations and delay punitive loan amendments, with no evidence of risk-shifting behavior. Collectively, these findings reveal how the growth of deep-pocketed institutional investors with controlling ownership stakes have given rise to a formal market mechanism that makes unilateral borrower control feasible.