Renegotiation Frictions and Financial Distress Resolution: Evidence from CDS Spreads

67 Pages Posted: 29 Mar 2015 Last revised: 9 May 2018

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: March 2, 2018

Abstract

This paper examines how the relaxation of renegotiation frictions impacts distressed debt resolution and ex-ante financial contracting. It does so exploiting a recent IRS regulation (TD9599) that reduced the taxes certain creditors owe upon restructuring debt out of court. CDS contracts insure creditors against in-court bankruptcy losses and CDS spreads reflect the shadow price of bankruptcy risk. Using a triple-differences estimation framework, we show that CDS spreads fell by record figures on the regulation's announcement, with declines concentrated among distressed firms that relied most on syndicated loans---the credit category treated by TD9599. Distressed firms' loan renegotiation rates more than doubled, as banks agreed to extend loan maturities in exchange for higher interest payments. Those firms' access to new syndicated loans increased while associated interest markups declined after TD9599.

Keywords: Loan renegotiation, taxes, bankruptcy, credit default swaps, credit access.

JEL Classification: G32, G33

Suggested Citation

Campello, Murillo and Ladika, Tomislav and Matta, Rafael, Renegotiation Frictions and Financial Distress Resolution: Evidence from CDS Spreads (March 2, 2018). 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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