The Business School 2nd academic lecture in 2015 was held on March11th from 10:00 to 11:00 in Business School 2/F Seminar Room.
The guest speaker was Dr. Desmond Tsang from Desautels Faculty of Management McGill University. The topic of this lecture is The Role of Debt Covenants in the Investment Grade Bond Market: The REIT Experiment.
Professor Tsang began his career in the auditing department at Deloitte and Touche in Hong Kong and later worked as an economist at the Ontario Ministry of Finance in Canada. Subsequently he pursued his PhD studies at the University of California at Berkeley, majoring in accounting and real estate. His research interests in accounting include: Earnings Management; Performance Measurement; IFRS & Accounting Fraud. Professor Tsang is a Certified Public Accountant (CPA) in the US and a Chartered Financial Analyst (CFA). Professor Tsang teaches Intermediate Financial Accounting I & Financial Statement Analysis at the undergraduate level and Intermediate Financial Reporting I at the MBA level. Recently, he was chosen by students of the Management Undergraduate Society as the Professor of the Year 2012.
First, Professor Tsang introduced the background; prior literature has long documented the important role of debt covenants (Jensen and Meckling, 1976; Myers, 1977; Smith and Warner, 1979). However, covenant protection is typically non-existent in the investment grade bond market. So the research themes are that: how common are covenants; Are covenants binding and how do covenants affect cost of debts. And findings are that covenants are common features in the investment grade REIT market, investment grade REIT covenants are not set as “trip wires” and firms choose provisions that they have more “slack” and nonbinding covenants serve to reduce cost of debt.
Then Professor Tsang raised three hypothesis, firstly, investment grade REIT are less likely to issue bonds with covenants; secondly, when investment grade REIT with covenants, these covenants are less likely to be binding; lastly, investment grade REIT issue bonds with covenants provisions to lower the cost of debt.
In the end, Professor Tsang concluded that, surprisingly, investment grade REITs are more likely to include covenants in their loan contracts. Because of the lower potential covenant violation cost: Investment grade REITs choose covenants on ratios they appear to have larger ‘slack’ and lower cost of debt: Despite covenants less binding, covenants nonetheless represent signal of loan quality and lower cost of debt.
Students and professors exchanged ideas about the topic for the end of the 2nd academic lecture in business school.
