Has the CDS market lowered the cost of corporate debt?

Ashcraft, Adam B.; Santos, João A. C.

doi:10.1016/j.jmoneco.2009.03.008

Cited by 282 publications

(187 citation statements)

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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%

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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%

“…We follow Ashcraft and Santos (2009) and Subrahmanyam et al (2014) and address these issues by comparing firms before and after CDS are actively traded on the firms' debt with firms that never have actively traded CDS at any point in time during the sample period, using the following regression framework:…”

Section: Baseline Specificationmentioning

confidence: 99%

The Impact of Credit Default Swap Trading on Loan Syndication *

Streitz

2015

Review of Finance

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“…Forte and Pena (2009) study the long run equilibrium relationships between bond, CDS and stock market implied spreads, and find that stocks lead CDS and bonds more frequently than the reverse, and the CDS market leads the bond market. Ashcraft and Santos (2009) find that CDS introduction has not lowered the cost of debt financing or loan funding for the average borrower. They further report that risky and informationally opaque firms appear to have been more adversely affected by the CDS market.…”

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confidence: 80%

Did CDS Trading Improve the Market for Corporate Bonds?

2011

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Did CDS Trading Improve the Market for Corporate Bonds?Financial innovation through the creation of new markets and securities impacts related markets as well, changing their efficiency, quality (pricing error) and liquidity. The credit default swap (CDS) market was undoubtedly one of the salient new markets of the past decade. In this paper we examine whether the advent of CDS trading was beneficial to the underlying secondary market for corporate bonds. We employ econometric specifications that account for information across CDS, bond, equity, and volatility markets. We also develop a novel methodology to utilize all observations in our data set even when continuous daily trading is not evidenced, because bonds trade much less frequently than equities. Using an extensive sample of CDS and bond trades over 2002-2008, we find that the advent of CDS was largely detrimental -bond markets became less efficient, evidenced no reduction in pricing errors, and experienced no improvement in liquidity. These findings are robust to various slices of the data set and specification of our tests.

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“…Duffee and Zhou (2001) show that while CDSs are attractive hedging instruments for banks, they can hurt banks through the market for loan sales. From the perspective of a borrower, Ashcraft and Santos (2009) find no evidence that CDS trading reduces the cost of debt financing for the average borrower, whereas Saretto and Tookes (2012) find that CDSs allow firms to borrow at longer maturities and to maintain higher leverage ratios. Bolton and Oehmke (2011) develop a theoretical model to analyze the costs and benefits of CDS from the perspective of an entrepreneur.…”

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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Has the CDS market lowered the cost of corporate debt?

Cited by 282 publications

References 29 publications

The Impact of Credit Default Swap Trading on Loan Syndication *

The Impact of Credit Default Swap Trading on Loan Syndication *

Did CDS Trading Improve the Market for Corporate Bonds?

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

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