Credit Default Swaps and Lender Incentives in Renegotiations of Bank Debt

65 Pages Posted: 21 Dec 2014 Last revised: 5 Mar 2020

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Rohan Ganduri

Emory University

Date Written: August 12, 2015

Abstract

We analyze how Credit Default Swaps (CDS) affect bank incentives and borrower outcomes in renegotiations after covenant violations. Using a regression-discontinuity design and within lender-borrower variation, we find that CDS firms maintain investment after control rights shift to the creditor, whereas non-CDS firms experience a significant decline. Moreover, CDS firms are less likely to experience distressed exits or rating downgrades in the two years after these technical defaults. Our results suggest that in the private debt markets, CDS discipline borrowers, while the empty creditor problem due to CDS is mitigated because of lenders' reputation concerns and lower coordination frictions.

Keywords: Bank Loans, Disciplining Effect, Covenant Violation, Empty Creditor Problem

JEL Classification: G21, G31, G32

Suggested Citation

Chakraborty, Indraneel and Chava, Sudheer and Ganduri, Rohan, Credit Default Swaps and Lender Incentives in Renegotiations of Bank Debt (August 12, 2015). Georgia Tech Scheller College of Business Research Paper No. 2015-20. Available at SSRN: https://ssrn.com/abstract=2541102 or http://dx.doi.org/10.2139/ssrn.2541102

Indraneel Chakraborty

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Rohan Ganduri (Contact Author)

Emory University ( email )

1300 Clifton Rd
Atlanta, GA 30322
United States

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