A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations

Franks, Julian R.; Torous, Walter N.

doi:10.1016/0304-405x(94)90037-x

Cited by 397 publications

(246 citation statements)

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“…Bank debt recovery rates are on average 80% in our sample. This is comparable to what is found in other studies (see Franks and Torous 1994;Thorburn 2000;Bris et al 2006). The regression analyses on bank debt recovery rates yield a negative effect of firm size, leverage and liquidation, while positive effects come from the collateral securing bank debts and the variable debtor filing.…”

Section: Discussionsupporting

confidence: 89%

“…Firm recovery rates are on average 37% of the total debt outstanding before the bankruptcy. This recovery rate is similar to the one found by Thorburn (2000) and Franks and Torous (1994). Nevertheless, they fall short of the rates as reported for prepackaged Chapter 11 procedures of 73% as reported by Tashijan et al (1996) and Bris et al (2006) for their Chapter 11 cases.…”

Section: Discussionsupporting

confidence: 83%

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Costs and recovery rates in the Dutch liquidation-based bankruptcy system

Couwenberg

Jong

2008

Eur J Law Econ

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We present evidence on the efficiency of the resolution of financial distress in bankruptcy in The Netherlands. Direct costs average 16%, firm recovery 37% and bank debt recovery 80%. The direct costs are lower in larger firms and in firms with more bank debt. Costs increase with the time it takes to sell assets. Firm recovery is influenced by asset structure, capital structure and to a lesser extent Dutch legal variables. However, the opportunity to continue operations in bankruptcy is chosen by about half the firms and this has a positive effect on recoveries.

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Section: Discussionsupporting

confidence: 89%

Section: Discussionsupporting

confidence: 83%

Costs and recovery rates in the Dutch liquidation-based bankruptcy system

Couwenberg

Jong

2008

Eur J Law Econ

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“…First, consistent with evidence in , there may be several creditors, other than the floating charge holder, that lend under physical collateral. Second, consistent with evidence in Franks and Torous (1994), S may represent the extent of violations of absolute priority in favour of junior creditors (as opposed to equity holders). 15 The hypergeometric distribution is a discrete probability distribution that describes the number of successes in a sequence of n draws from a finite population without replacement (as opposed to the binomial distribution that describes the number of successes for draws with replacement).…”

Section: Exogenous Coalition Formationsupporting

confidence: 57%

Contractual Resolutions of Financial Distress

Gennaioli

Rossi

2009

SSRN Journal

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In a financial contracting model we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes co-exist − one class fully concentrated and with control rights upon default, the other dispersed and without control rights − removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. More broadly, our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.JEL classification: G33, K22.

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“…Theoretical contributions show how different frictions, notably asymmetric information and free-rider problems, impede the success of restructurings (e.g., Giammarino 1989;Coffee and Klein 1991;Gertner and Scharfstein 1991;Bernardo and Talley 1996;Hege 2003;or Hennessy and Zechner 2011). In the empirical literature, some authors compare different types of debt restructurings (e.g., Gilson, John, and Lang 1990;Asquith, Gertner, and Scharfstein 1994;Franks and Torous 1994;Chatterjee, Dhillon, and Ramírez 1996). These restructurings range from bank workouts, distressed exchange offers, and pre-packaged bankruptcies to traditional bankruptcy procedures.…”

Section: Jel Kódok: G33 G34mentioning

confidence: 99%

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Danis

2017

Management Science

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Do Empty Creditors Matter?Evidence from Distressed Exchange Offers András DanisAbstract I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms.Theoretically, I show that if bondholders are insured with CDSs, the participation rate in a restructuring decreases. Using a sample of distressed exchange offers, I estimate that the participation rate is 29% lower if the firm has CDSs traded on its debt, compared to an unconditional mean of 54%. I use the introduction of the Big Bang protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out-ofcourt, which is inefficient because it increases the likelihood of future bankruptcy.Keywords: credit default swaps, CDS, empty creditor, restructuring, bankruptcy Abstract I examine the effect of credit default swaps (CDSs) on the restructuring of distressed firms. Theoretically, I show that if bondholders are insured with CDSs, the participation rate in a restructuring decreases. Using a sample of distressed exchange offers, I estimate that the participation rate is 29% lower if the firm has CDSs traded on its debt, compared to an unconditional mean of 54%. I use the introduction of the Big Bang protocol as a natural experiment. The results suggest that firms with CDSs find it difficult to reduce debt out-of-court, which is inefficient because it increases the likelihood of future bankruptcy. For example, if the CDS insures the face value of debt, creditors will reject any offers by a financially distressed company for payments below face value. Thus, if a firm's lenders are empty creditors, i.e. insured with CDSs, the firm cannot easily reduce its debt in an out-ofcourt restructuring prior to bankruptcy. I present evidence consistent with this hypothesis.Credit default swaps pose a problem because failure to renegotiate debt privately can increase the likelihood of future bankruptcy, which can incur deadweight losses. In addition, the existence of CDSs might also be relevant for firms that are not currently distressed. Their investment and financing decisions today can depend on the possibility that debt may be difficult to renegotiate if the firm encounters financial distress. Also, the question addressed in this paper relates to the broader topic of the net welfare effects of CDSs in the economy.Bolton and Oehmke (2011) argue that CDS contracts introduce certain inefficiencies, but that t...

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A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations

Cited by 397 publications

References 12 publications

Costs and recovery rates in the Dutch liquidation-based bankruptcy system

Costs and recovery rates in the Dutch liquidation-based bankruptcy system

Contractual Resolutions of Financial Distress

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

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