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Mr. Jefferson K. Abraham
Ph.D. Candidate in Accounting
London Business School

This paper provides the first systematic evidence on the effects of Equity Cures, a contracting innovation in syndicated lending, on debt contracting. Equity Cures allow borrowers to remedy financial covenant violations through equity infusions, preventing the transfer of control rights to lenders. Consistent with incomplete contracting theory, I find that ownership by private equity sponsors, with access to capital and controlling stakes, is a key determinant of the presence of Equity Cures. I show that cure rights command a significant price premium and influence covenant design, being negatively associated with capital covenant presence and the number of performance covenants. To assess whether Equity Cures meet their intended objectives, I also examine the ex post effects of these cure rights. Their use appears to reduce covenant violations and delay unfavorable loan amendments, with no evidence of borrower risk-shifting behavior. Collectively, these findings suggest that the use of Equity Cures by sophisticated market participants enhances debt contracting efficiency.