Distressed Debt Restructuring in the Presence of Credit Default Swaps

Abstract:     
The availability of credit insurance via credit default swaps (CDSs) has been closely associated with the emergence of empty creditors, i.e. insured debtholders who may find it convenient to force distressed firms into bankruptcy even when an out-of-court renegotiation would be the most efficient choice. We empirically investigate this issue by looking at the restructuring outcome (distressed exchanges versus bankruptcy filings) of rated, non-financialU.S. companies over the period Jan 2007-Jun 2011. Contrary to the predictions of the empty creditor theory, we do not find evidence that the access to credit insurance favors bankruptcy over a debt workout. The probability of filing for Chapter 11 is instead significantly associated with high leverage and short-term refinancing needs, and a simplified debt structure characterized by a high proportion of secured debt. Our results are robust to the usage of different proxies for the existence of insured creditors, as well as to the inclusion of instrumental variables and sample matching.

Number of Pages in PDF File: 38

Keywords: Credit default swaps, empty creditors, debt restructuring

JEL Classification: E51, G32, G33

working papers series