TY - JOUR T1 - Managing Rollover Risk with Capital Structure Covenants in Structured Finance Vehicles JF - The Journal of Fixed Income SP - 92 LP - 112 DO - 10.3905/jfi.2017.26.4.092 VL - 26 IS - 4 AU - Sanjiv Ranjan Das AU - Seoyoung Kim Y1 - 2017/03/31 UR - https://pm-research.com/content/26/4/92.abstract N2 - 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 ER -