Investment Banks and Public Debt Exchange Offers in Financial Distress
44 Pages Posted: 7 Nov 2000
Date Written: October 2000
This paper examines the relationship between investment bank participation in public debt exchange offers by financially distressed firms and the composition of the offer. Investment banks negotiate with bondholders on behalf of the firm, act as dealer manager for the exchange, promote the offer, and solicit tenders. We find that the structure of exchange offers is significantly related to whether an investment bank participates as an intermediary. Exchange offers with investment bank participation are characterized by significantly greater debt reduction and significantly less senior debt offered to bondholders. Investment bank participation is negatively related to the ratio of commercial bank debt relative to total debt, but positively related to commercial bank debt forgiveness. In general, the results suggest that investment banks and commercial banks perform both substitute and complementary roles in facilitating public debt exchange offers.
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