Credit Default Swaps and the Empty Creditor Problem

Abstract

School, and the NBER Corporate Finance meetings. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Distressed Debt Restructuring in the Presence of Credit Default Swaps

“…However, at least on average, their presence does not seem to distort the final restructuring outcome toward a higher incidence of bankruptcy. In this respect, our results are consistent with the theoretical predictions of Bolton and Oehmke () who argue that the presence of CDSs does not inevitably lead to an inefficient restructuring outcome.…”

“…The concerns regarding the distortive effects of CDSs on debt restructuring may, however, be excessive. Bolton and Oehmke () argue that the presence of insured creditors can have positive or negative effects. On the positive side, CDSs raise the creditors' bargaining power and enable lenders to extract more in debt renegotiations.…”

“…Two of the measures (reference entities in top tercile for intangible assets and reference entities in top tercile for bond dispersion) are inspired by the predictions of the empty creditor theory. Bolton and Oehmke () argue that overinsured creditors are more likely to emerge when there is a high probability of an ample renegotiation surplus upon default and when the firm raises debt from multiple creditors. The other two proxies (reference entities in top tercile for senior unsecured debt ratio and reference entities with liquid CDS contracts) intuitively identify those firms where empty creditors are more likely to emerge from a practical viewpoint.…”

The Drivers of Credit Default Swap Prices: Evidence from Selected Emerging Market Countries

“…It is expected that the main motivation behind CDS trading is the credit-risk hedging, yet these instruments are traded for manipulation as well. Bolton and Oehmke (2011) discuss a special case in which the debtor buys her own CDSs. This type of trade is defined as the "empty creditor" problem by Bolton and Oehmke.…”

Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage

“…The European Journal of Finance 5 Black (2008) and Bolton and Oehmke (2010), have suggested that the trading of CDS positions results in an empty creditor problem. In this case, the debt holder acquires default protection but retains various control rights in the event of default.…”