Bankruptcy and the Collateral Channel

Abstract

Do bankrupt firms impose negative externalities on their nonbankrupt competitors? We propose and analyze a collateral channel in which a firm's bankruptcy reduces the collateral value of other industry participants, thereby increasing their cost of debt financing. We identify the collateral channel using novel data of secured debt tranches issued by U.S. airlines that include detailed descriptions of the underlying collateral pools. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects that amplify the business cycle during industry downturns.

Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms

“…Even if the job insecurity in our study results exclusively from economic distress, we would expect labor supply to respond similarly to financial distress, which is also known to increase the likelihood of downsizing and job insecurity (Agrawal and Matsa (2013), Falato and Liang (2014)). 7 7 In addition to the labor market effects examined in this paper, distress may affect real asset prices (Pulvino (1998)); competitors' collateral values (Benmelech and Bergman (2011)); and how firms compete in product markets, including entry (Chevalier (1995a)), exit (Kovenock and Phillips (1997), Zingales (1998)), pricing (Chevalier (1995b), Phillips (1995), Chevalier and Scharfstein (1996)), and product quality (Rose (1990), Borenstein and Rose (2003), Matsa (2011), Phillips and Sertsios (2013)). Most recently, Hortascu et al (2013) find that prices for used automobiles respond to high-frequency fluctuations in manufacturers' distress.…”

The Impact of Tax Rebate on Used Car Market: Evidence from Thailand

“…The increase could, in turn, suppress prices of the stock of durable goods outstanding. In addition to the supply effect that can depress the prices of outstanding durable goods in the market, to the extent that these purchases are financed by debt, changes to borrowers' circumstances that may eventually lead to default, repossession and resale of the goods can lead to additional fire sale discount, as shown by Benmelech and Bergman (2011). In this article, we focus on the impact that a primary-market tax incentive has on the secondary market.…”

Intra‐industry bankruptcy contagion: Evidence from the pricing of industry recovery rates

“…It is important to emphasize that, in our research design, we cannot pinpoint exactly how the distressed asset value of a bankrupt company, as reflected in the industry recovery rate, manifests itself in the higher costs of debt of its non-bankrupt peers. For unsecured loans, the higher loan spreads could be the result of the weakening of debtors' balance sheets as the assets are subject to the fire-sale discount; for secured loans, the effect could be transmitted via the collateral channel, as examined by Benmelech and Bergman (2011) in their study on equipment trust certificates (ETCs) issued by US airlines. According to the collateral channel, one company's bankruptcy results in an increased (decreased) supply of (demand for) industry assets that also serve as collateral in its peers' secured financing.…”

“…external debt financing for the entire industry. Benmelech and Bergman (2011) are able to identify the collateral channel by matching aircraft operated by the bankrupt airline with those underlying the ETCs and analyzing the differential impacts of an airline's bankruptcy on the spread of ETCs secured by different kinds of aircraft. 4 Aviation financing is specific, in the sense that most of the debts are secured by a single industry asset, the aircraft, which is mobile and thus can be readily reclaimed/redeployed by the creditor in the case of default.…”

“…By incorporating industry-specific characteristics in our analysis (e.g., industries with different degrees of asset specificity), we are able to generalize our findings to different industry settings. Another difference between our study and that of Benmelech and Bergman (2011) is that we focus on private market syndicated loans, while they examine ETCs traded on the public market. The two studies therefore complement each other in covering both the private and public debt markets, involving different kinds of market participants.…”