The Administrative Costs of Debt Restructurings: Some Recent Evidence

Betker, Brian L.

doi:10.2307/3666127

Cited by 77 publications

(61 citation statements)

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“…In a different study, Betker (1997) provides evidence that out-of-court restructurings are less costly than formal bankruptcy, which supports the claim that a shift towards more frequent bankrupcties is inefficient. More closely related is Narayanan and Uzmanoglu (2012), who show that if distressed firms have multiple classes of debt, they try to reduce debt within a class that is less affected by empty creditors.…”

Section: Jel Kódok: G33 G34mentioning

confidence: 51%

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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Section: Jel Kódok: G33 G34mentioning

confidence: 51%

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Danis

2017

Management Science

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“…Using this definition, Alderson and Betker (1995) and Gilson (1997) report liquidation costs equal to 36.5% and 45.5% for the median firm in their samples. Costs of financial distress lie between 3% and 7.5% of firm value 1 year before bankruptcy in the empirical studies by Warner (1977), Weiss (1990), or Betker (1997. The average time period between the indication of financial distress and its resolution is between 2 and 3 years for firms that renegotiate their claims under Chapter 11 of the U.S. Bankruptcy Code (see Franks and Torous 1989;Gilson 1997;or Helwege 1999).…”

Section: A the Timing Of Defaultmentioning

confidence: 99%

Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

Morellec

François

2001

SSRN Journal

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“…Moreover, she shows that about two-thirds of Chapter 11 …rms require more than one plan before an agreement can be attained. As far as the judge behavior is concerned, we assume that her impatience is constant 6 The quarterly amount of subordinated debt is not reported by Compustat.…”

Section: Bankruptcy-speci…c Parametersmentioning

confidence: 99%

Resolution of financial distress under Chapter 11

Annabi

Breton

François

2012

Journal of Economic Dynamics and Control

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Abstract:We develop a contingent claims model of a firm in financial distress with a formal account for renegotiations under the Chapter 11 bankruptcy procedure. Shareholders and two classes of creditors (senior and junior) alternatively propose a reorganization plan subject to a vote. The bankruptcy judge can intervene in any renegotiation round to impose a plan. The multiple-stage bargaining process is solved in a non-cooperative game theory setting. The calibrated model yields liquidation rate, Chapter 11 duration and percentage of deviations from the Absolute Priority Rule that are consistent with empirical evidence.

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The Administrative Costs of Debt Restructurings: Some Recent Evidence

Cited by 77 publications

References 0 publications

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Capital Structure and Asset Prices: Some Effects of Bankruptcy Procedures

Resolution of financial distress under Chapter 11

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