RT Journal Article SR Electronic T1 Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles JF The Journal of Fixed Income FD Institutional Investor Journals SP 92 OP 112 DO 10.3905/jfi.2017.26.4.092 VO 26 IS 4 A1 Sanjiv Ranjan Das A1 Seoyoung Kim YR 2017 UL https://pm-research.com/content/26/4/92.abstract AB 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