How Do Firms Respond to Empty Creditor Holdout in Distressed Exchanges?
47 Pages Posted: 19 Mar 2012 Last revised: 21 Sep 2018
Date Written: June 20, 2018
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: Suggested Citation