Corporate governance embedded in corporate bond indentures issued in Brazil

Abstract

Corporate bonds have been one of the major sources of medium and long-term financing in Brazil. We analyze how corporate bond covenants have been used to mitigated agency costs between shareholders and bondholders. Our data includes 119 corporate bond indentures issued from 1998 to 2001 and 141 issued from 2002 to 2005 in Brazil. This paper analyzes whether public investors have demanded stricter terms in corporate bond indentures. When comparing to previous studies of Anderson (1999) and of Filgueira and Leal (2001), we found empirical evidence that: more bond issues with no indexed inflation features, but more floating rate interest features to match market needs; no major changes for contingent maturity features; loose covenants with respect to dividend and financing actions; and tighter covenants regarding change in control and/or ownership and negative pledge. There is empirical evidence that the role of sponsor may partially mitigate risks borne by bondholders.