Corporate Leverage, Debt Maturity and Credit Supply: The Role of Credit Default Swaps

Saretto, Alessio; Tookes, Heather

doi:10.2139/ssrn.1780426

Cited by 90 publications

(195 citation statements)

References 23 publications

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“…If CDS trading replaces existing risk management tools, it is unlikely to have a strong impact on credit supply by banks and on loan contract terms. This is consistent with existing studies, which find mixed e ects of CDS trading on credit markets (Hirtle (2009); Ashcraft and Santos (2009) ;Saretto and Tookes (2013);Shan et al (2014)). 2…”

Section: Introductionsupporting

confidence: 92%

“…Ideally one would like to use both bond and loan market information to determine investors' demand for CDS. However, as argued by Saretto and Tookes (2013) the hedging activity of firms' lead banks is expected to impact both the loan and bond components of firm's debt. Lead lenders 11 As in Saretto and Tookes (2013) we use the foreign exchange derivatives used for hedging (not trading) purposes.…”

Section: Endogeneitymentioning

confidence: 99%

“…The enhanced risk-sharing via credit default swaps (CDS) can alleviate credit supply frictions (Saretto and Tookes (2013); Shan et al (2014)). However, a necessary condition for any positive e ect of CDS trading is that creditors actively use CDS to manage credit risk.…”

Section: Introductionmentioning

confidence: 99%

“…We address these concerns by constructing a model to predict CDS trading and further use this model to run an instrumental variable estimation. We follow Saretto and Tookes (2013) and Subrahmanyam et al (2014) and use banks' foreign exchange derivative holdings as an instrument for CDS trading. 1 Our results are robust to potential endogeneity concerns.…”

Section: Introductionmentioning

confidence: 99%

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The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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We analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.Keywords: Loan Sales, Credit Default Swaps, Syndicate Structure, Syndicated Loans JEL-Classification: G21, G32ú Daniel Streitz is from the Institute of Corporate Finance at Humboldt University Berlin. The author would like to thank Tim Adam, Tobias Berg, Valentin Burg, Sudipto Dasgupta, Hermann Elendner, Xavier Giroud, Laurenz Klipper, Augustin Landier, Christian Laux, Gustavo Manso, Martin Oehmke, Steven Ongena (the editor), Gordon Phillips, Tobias Scheinert, Sascha Ste en, Alex Stomper, Gunter Strobl, and an anonymous referee for helpful comments and suggestions. Some of the work on this paper was completed while the author was visiting USC Marshall School of Business. The author gratefully acknowledges financial support from the Deutsche Forschungsgemeinschaft through SFB 649 "Economic Risk" and SFB-TR15 "Governance and the E ciency of Economic Systems". Send correspondence to Daniel Streitz, Institute of Corporate Finance, Dorotheenstrasse 1, 10099 Berlin, Germany; E-mail: daniel.streitz@wiwi.hu-berlin.de. The Impact of Credit Default Swap Trading on Loan Syndicationú February 2, 2015 AbstractWe analyze the impact of CDS trading on bank syndication activity. Theoretically, the e ect of CDS trading is ambiguous: on the one hand, CDS can improve risksharing and hence be a more flexible risk management tool than loan syndication; on the other hand, CDS trading can reduce bank monitoring incentives. We document that banks are less likely to syndicate loans and retain a larger loan fraction once CDS are actively traded on the borrower's debt. We then discern the risk management and the moral hazard channel. We find no evidence that the reduced likelihood to syndicate loans is a result of increased moral hazard problems.

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Section: Introductionsupporting

confidence: 92%

Section: Endogeneitymentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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“…Therefore, the CDS dummy seems to be a useful proxy variable for the CDS insurance ratio. This variable is also used by Saretto and Tookes (2012), Bedendo, Cathcart, andEl-Jahel (2011), andSubrahmanyam, Tang, andWang (2012).…”

Section: Empirical Frameworkmentioning

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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Central clearing and CDS market quality

Silva

Vieira

2018

Journal of Futures Markets

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This paper contributes to the literature on the impact of central clearing on financial market quality. Focusing on the CDS market, a difference‐in‐differences analysis is performed to identify effects of voluntary central clearing of contracts on ICECC and ICECE. Patterns of market quality proxies are compared before and after central clearing initiation. We conclude that central clearing improves liquidity, price informativeness and precision, and also the integration of the CDS and stock markets. Results are inconclusive for the impact on CDS price volatility.

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Corporate Leverage, Debt Maturity and Credit Supply: The Role of Credit Default Swaps

Cited by 90 publications

References 23 publications

The Impact of Credit Default Swap Trading on Loan Syndication *

The Impact of Credit Default Swap Trading on Loan Syndication *

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Central clearing and CDS market quality

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