Bank Loan Renegotiation and Credit Default Swaps
51 Pages Posted: 16 Oct 2017 Last revised: 21 May 2019
Date Written: March 23, 2019
We find that the inception of CDS trading on reference firms’ debt is associated with a decreased number and lower probability of amendments, restatements, and rollovers to existing lenders of bank loans. Reference firms are also less likely to terminate loans prematurely or refinance with different lenders after the inception of CDS trading and tend to experience shorter loan renegotiations. Evidence is consistent with the “empty creditor” problem arising from CDS trading and the resulting decrease in the negotiation power of borrowers. Our research contributes to understanding how financial innovations alter bank lending relationships.
Keywords: CDS, credit derivatives, credit default swaps, empty creditor, bank loans, renegotiation
JEL Classification: G21, G20, G33
Suggested Citation: Suggested Citation