In- and Out-of-Court Debt Restructuring in the Presence of Credit Default Swaps

Abstract

This paper investigates whether the availability of credit insurance via credit default swaps (CDS) has inuenced the debt restructuring process in a sample of U.S. reference entities. Contrary to the predictions of the empty creditors theory, we do not find evidence that the presence of CDS favors bankruptcy over a private workout. The main determinants of the probability of filing for bankruptcy in the 2008-2009 crisis are leverage and short-term debt ratios, the proportion of secured debt, and a simplified debt structure concentrated on bank debt. A significant increase in private workouts follows the introduction of the 2009 Recovery Act.