Credit Derivatives & the Future of Chapter 11

Abstract:     
Credit derivatives transfer the default risk of an underlying debt instrument, without transferring legal title. These transactions have several benefits outside of bankruptcy. But once a corporate debtor enters bankruptcy - in particular, chapter 11 - it enters a bargaining process that was bottomed on a model of creditor behavior that may no longer hold because of credit derivatives. A creditor may not act like a traditional creditor if they no longer face the risk of non-payment because that risk has been hedged. In this essay I argue that credit derivatives will substantially alter chapter 11, at least with respect to large corporate debtors.

Number of Pages in PDF File: 27

Keywords: Swaps, Derivatives, Chapter 11, Reorganization, CDS, credit default swaps

working papers series