Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Danis, András

doi:10.2139/ssrn.2023288

Cited by 11 publications

(14 citation statements)

References 15 publications

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“…A key concern in our analysis is the correct identification of companies that may be affected by empty creditors. In line with related literature (Peristiani and Savino , Danis , Saretto and Tookes , Subrahmanyam, Tang, and Wang ), we use the CDS dummy as a first proxy for the presence of insured creditors under the assumption that, when CDSs are traded on a company's debt, at least some CDS investors are also debtholders. This assumption is indeed realistic: Major institutional investors of corporate bonds such as banks and insurance companies regularly report that credit risk hedging accounts for a significant portion of their activities in CDSs (see the Quarterly Report on Bank Derivatives Activities and the Capital Markets Special Report on the Insurance Industry Derivatives Exposure —various issues).…”

Section: Empirical Findingsmentioning

confidence: 99%

“…This assumption is indeed realistic: Major institutional investors of corporate bonds such as banks and insurance companies regularly report that credit risk hedging accounts for a significant portion of their activities in CDSs (see the Quarterly Report on Bank Derivatives Activities and the Capital Markets Special Report on the Insurance Industry Derivatives Exposure —various issues). In addition, Danis () and Adam and Guettler () provide evidence that fixed income mutual funds routinely purchase protection through CDSs to hedge the credit risk associated with the underlying bond portfolios.…”

Section: Empirical Findingsmentioning

confidence: 99%

“…We shall emphasize that our analysis does not provide a direct empirical test of the empty creditor hypothesis: Such verification is unfeasible, as it would require data on the proportion of the firm's unsecured debt which is insured through CDSs, and these data are not available . In line with related literature (Peristiani and Savino , Danis , Saretto and Tookes , Subrahmanyam, Tang, and Wang ), we first use the existence of a CDS contract on the firm's debt as a proxy for the presence of insured creditors. While the use of the CDS dummy seems appropriate to identify companies that have some insured creditors, the question remains as to whether the number of the insured creditors as well as the level of the credit insurance purchased are sufficient to materially affect restructuring in case of distress.…”

mentioning

confidence: 99%

“…Other related contributions investigate the empty creditor predictions by comparing distressed exchange offers in reference entities and other firms and report mixed results. Danis () documents a lower participation rate to distressed exchanges in reference entities, while Narayanan and Uzmanoglu () argue that firms successfully respond to the resistance of empty creditors by restructuring their debt strategically. We complement these studies by looking at the full set of in‐ and out‐of‐court renegotiations, which enables us to directly assess the impact of credit insurance on the final restructuring choice.…”

mentioning

confidence: 99%

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Distressed Debt Restructuring in the Presence of Credit Default Swaps

Bedendo¹,

Cathcart²,

El-Jahel³

2016

Journal of Money, Credit and Banking

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The availability of credit insurance via credit default swaps has been closely associated with the emergence of empty creditors. We empirically investigate this issue by looking at the debt restructurings (distressed exchanges and bankruptcy filings) of rated, nonfinancial U.S. companies over the period January 2007–June 2011. Using different proxies for the existence of insured creditors, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. However, we document higher recovery prices following a distressed exchange in firms where empty creditors are more likely to emerge.

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Section: Empirical Findingsmentioning

confidence: 99%

Section: Empirical Findingsmentioning

confidence: 99%

mentioning

confidence: 99%

mentioning

confidence: 99%

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Distressed Debt Restructuring in the Presence of Credit Default Swaps

Bedendo¹,

Cathcart²,

El-Jahel³

2016

Journal of Money, Credit and Banking

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“…Such views are echoed by Arentsen et al (2015), who document that the loan delinquency rate for subprime loans underlying mortgage-backed securities that were subject to CDS coverage increased during the financial crisis and that the existence of CDS increased the supply of lower-quality subprime securities. There is also evidence that the existence of CDS had an influence on corporate restructuring outcomes (as documented by Bedendo, Cathcart & El-Jahel 2016, Narayanan & Uzmanoglu 2012, which could stem from a reduced interest in voting participation as a consequence of the availability of credit insurance (Danis 2013).…”

Section: Impact Of Cds On Firm Characteristics and Economic Incentivesmentioning

confidence: 99%

Credit Default Swaps: Past, Present, and Future

Augustin

Subrahmanyam

Tang

et al. 2016

Annu. Rev. Financ. Econ.

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Credit default swaps (CDS) have grown to be a multi-trillion-dollar, globally important market. The academic literature on CDS has developed in parallel with the market practices, public debates, and regulatory initiatives in this market. We selectively review the extant literature, identify remaining gaps, and suggest directions for future research. We present a narrative including the following four aspects. First, we discuss the benefits and costs of CDS, emphasizing the need for more research in order to better understand the welfare implications. Second, we provide an overview of the postcrisis market structure and the new regulatory framework for CDS. Third, we place CDS in the intersection of law and finance, focusing on agency conflicts and financial intermediation. Last, we examine the role of CDS in international finance, especially during and after the recent sovereign credit crises. 10.1

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Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

Subrahmanyam

Tang

Wang

2015

India Studies in Business and Economics

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Concerns have been raised, especially since the global financial crisis, about whether trading in credit default swaps (CDS) increases the credit risk of the reference entities. This study examines this issue by quantifying the impact of CDS trading on the credit risk of firms. We use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers between June 1997 and April 2009 to address this question. We present evidence that the probability of a credit downgrade and of bankruptcy both increase after the inception of CDS trading. The effect is robust to controlling for the endogeneity of CDS introduction, i.e., the possibility that firms selected for CDS trading are more likely to suffer a subsequent deterioration in creditworthiness. We show that the CDS-protected lenders' reluctance to restructure is the most likely cause of the increase in credit risk. We present evidence that firms with relatively large amounts of CDS contracts outstanding, and those with "No Restructuring" contracts, are more likely to be adversely affected by CDS trading. We also document that CDS trading increases the level of participation of bank lenders to the firm. Our findings are broadly consistent with the predictions of the "empty creditor" model of Bolton and Oehmke (2011 ABSTRACTConcerns have been raised, especially since the global financial crisis, about whether trading in credit default swaps (CDS) increases the credit risk of the reference entities. This study examines this issue by quantifying the impact of CDS trading on the credit risk of firms. We use a unique, comprehensive sample covering 901 CDS introductions on North American corporate issuers between June 1997 and April 2009 to address this question. We present evidence that the probability of a credit downgrade and of bankruptcy both increase after the inception of CDS trading. The effect is robust to controlling for the endogeneity of CDS introduction, i.e., the possibility that firms selected for CDS trading are more likely to suffer a subsequent deterioration in creditworthiness. We show that the CDS-protected lenders' reluctance to restructure is the most likely cause of the increase in credit risk. We present evidence that firms with relatively large amounts of CDS contracts outstanding, and those with "No Restructuring" contracts, are more likely to be adversely affected by CDS trading. We also document that CDS trading increases the level of participation of bank lenders to the firm. Our findings are broadly consistent with the predictions of the "empty creditor" model of Bolton and Oehmke (2011).

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Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Cited by 11 publications

References 15 publications

Distressed Debt Restructuring in the Presence of Credit Default Swaps

Distressed Debt Restructuring in the Presence of Credit Default Swaps

Credit Default Swaps: Past, Present, and Future

Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk

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