How Do Firms Respond to Empty Creditor Holdout in Distressed Exchanges?

47 Pages Posted: 19 Mar 2012 Last revised: 21 Sep 2018

See all articles by Rajesh Narayanan

Rajesh Narayanan

Louisiana State University

Cihan Uzmanoglu

Binghamton University, The State University of New York

Date Written: June 20, 2018

Abstract

Empty creditors — bondholders hedged with Credit Default Swaps (CDSs) — face incentives to holdout from “Distressed Exchanges” (DEs) of debt because the CDS hedge alters their payoffs to favor bankruptcy. We show using detailed data on DEs that firms respond to this holdout problem by targeting junior bondholders who are more likely to tender than senior bondholders. Furthermore, we show that doing so allows them to successfully reduce debt through the DE and avoid bankruptcy. Our evidence underscores the importance of the firm’s response to the holdout problem in understanding the role of empty creditors in distress resolution.

Keywords: Credit Default Swaps (CDS), Empty Creditors, Financial Distress, Debt Restructuring, Distress Resolution

JEL Classification: G10, G30, G33, G34

Suggested Citation

Narayanan, Rajesh and Uzmanoglu, Cihan, How Do Firms Respond to Empty Creditor Holdout in Distressed Exchanges? (June 20, 2018). Journal of Banking and Finance, Vol. 94, 251-266, Available at SSRN: https://ssrn.com/abstract=2024374 or http://dx.doi.org/10.2139/ssrn.2024374

Rajesh Narayanan (Contact Author)

Louisiana State University ( email )

Baton Rouge, LA 70803-6308
United States
225-578-6236 (Phone)

Cihan Uzmanoglu

Binghamton University, The State University of New York ( email )

Binghamton, NY 13902-6001
United States
607 777 66 38 (Phone)

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