Covenant Based Credit Capacity Model for Real Estate Capital Groups: Evidence from Poland
Purpose: The study aims to specify the form of the model used to determine the ability to obtain external financing (net debt) by real estate capital groups. The study also focuses on verifying the covenant function as a tool to limit the scale of projects implemented by real estate holdings. Approach/Methodology/Design: The analysis was carried out based on consolidated financial data of all (residential, commercial, and residential/commercial) real estate capital groups whose bonds are listed on the Catalyst bond in Poland. However, the said model is universal. The paper uses a method of examining documents, a method of analysis, and logical and qualitative construction to formulate new hypotheses, which can then be verified using a quantitative approach based on a larger sample. The Pearson correlation coefficient determined the relationship strength among covenants' pairs and between covenants and sensitivity ratio for the sample and the significance by the statistics t. Findings: The initiative to select covenants and determine their levels lies with issuers rather than investors. The inclusion of ND/EBITDA covenant in 75% of cases would mean an important reduction in credit exposure. The significant correlation among covenants identified in the study means duplication of information about the issuer's risk. Practical Implications: This study's conclusions can be used in the process of structuring the terms and conditions of corporate bond issues and provide important and new information primarily for bondholders in the context of leverage potential and the possibility of risk monitoring using covenants. The application contribution refers to the conclusions from the analysis of the monitoring potential of financial covenants and the influence of covenants on the change in the potential of capital groups due to the tightening of banks' credit policy at the level of special purpose vehicles. Originality/Value: The results of the analysis and theoretical considerations in this article complement existing research in the field of covenants' application by different stakeholders of bond issue programs.