Do Empty Creditors Matter? Evidence from Distressed Exchange Offers

Abstract:     
The empty creditor hypothesis states that debtholders are less willing to agree to a restructuring if they are insured with credit default swaps (CDS). However, recent studies measure the success of debt restructurings and find that it is not affected by the availability of CDS contracts. I use a more precise measure of the success of out-of-court restructurings and show that CDS have a negative effect on debt reductions. The average participation rate in U.S. distressed exchange offers is 29% lower if the firm is a reference entity in the CDS market, compared to an unconditional mean of 54%. The paper uses the introduction of the Big Bang protocol as a natural experiment. The results suggest that firms with CDS find it difficult to reduce debt out-of-court, which is inefficient because it increases the likelihood of future bankruptcy.

Number of Pages in PDF File: 51

Keywords: CDS, empty creditors, distressed exchange offer, restructuring, bankruptcy

JEL Classification: G33,G34

working papers series