Bank Loan Renegotiation and Credit Default Swaps

51 Pages Posted: 16 Oct 2017 Last revised: 21 May 2019

See all articles by Brian J. Clark

Brian J. Clark

Rensselaer Polytechnic Institute (RPI); Office of the Comptroller of the Currency

James Donato

Long Island University, C.W. Post Campus, College of Management

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Thomas Shohfi

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting

Date Written: March 23, 2019

Abstract

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

Clark, Brian J. and Donato, James and Francis, Bill B. and Shohfi, Thomas, Bank Loan Renegotiation and Credit Default Swaps (March 23, 2019). Available at SSRN: https://ssrn.com/abstract=3053337 or http://dx.doi.org/10.2139/ssrn.3053337

Brian J. Clark

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States
202-215-6500 (Phone)

James Donato (Contact Author)

Long Island University, C.W. Post Campus, College of Management ( email )

720 Northern Blvd.
Brookville, NY 11548-0570
United States

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Thomas Shohfi

Rensselaer Polytechnic Institute (RPI) - Department of Finance and Accounting ( email )

Pittsburgh Building
110 8th street
Troy, NY 12180
United States

HOME PAGE: http://shohfi.com/

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