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Renegotiation or Bankruptcy? The Effects of Out-of-Court Costs on Distress Resolution

65 Pages Posted: 29 Mar 2015 Last revised: 22 Aug 2016

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Tomislav Ladika

University of Amsterdam

Rafael Matta

University of Amsterdam - Finance Group

Date Written: August 19, 2016

Abstract

A recent change to the U.S. tax code (IRS Regulation TD9599) lowered the costs certain creditors incur when restructuring debt out of court. We use this setting to show how CDS spreads gauge the cost wedge between in- versus out-of-court distress resolution. CDS spreads declined by record figures on the regulation's announcement, with declines concentrated among distressed firms with higher ratios of syndicated loans -- the credit category treated by TD9599. Critically, distressed firm's loan renegotiation rates more than doubled, reducing their exposure to financial distress costs, which we estimate are up to 36% of firm value. Those firms' access to syndicated loans increased while associated interest markups declined.

Keywords: Debt renegotiation, bankruptcy, credit default swaps, corporate taxes, credit access

JEL Classification: G32, G33

Suggested Citation

Campello, Murillo and Ladika, Tomislav and Matta, Rafael, Renegotiation or Bankruptcy? The Effects of Out-of-Court Costs on Distress Resolution (August 19, 2016). Available at SSRN: https://ssrn.com/abstract=2586176 or http://dx.doi.org/10.2139/ssrn.2586176

Murillo Campello (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Tomislav Ladika

University of Amsterdam ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands
020-5255501 (Phone)

HOME PAGE: http://www1.fee.uva.nl/pp/tladika/

Rafael Matta

University of Amsterdam - Finance Group ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/pp/rmatta/

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