The CDS Market Reaction to Loan Renegotiation Announcements

39 Pages Posted: 26 Mar 2020 Last revised: 30 Mar 2021

See all articles by Florina Silaghi

Florina Silaghi

Autonomous University of Barcelona

Alfredo Martín‐Oliver

University of the Balearic Islands

Ahmed Sewaid

Insper Institute of Education and Research

Date Written: December 16, 2020

Abstract

This paper analyzes the credit market's reaction to loan renegotiation announcements through changes in credit default swap (CDS) spreads. Using a sample of public US firms during the period 2010-2017, we document a positive and significant CDS market reaction (decrease in CDS spreads). The strongest reactions are for material amendments such as line of credit amount or tranche amount. On the contrary, we find no significant stock market reaction. Moreover, we identify an anticipation effect of up to 30 days before the announcement date on the CDS market. Finally, we show that firm-specific CDS returns lead the idiosyncratic component of stock returns especially around the announcement date and for speculative-rated firms.

Keywords: Renegotiation, Bank loans, Credit default swaps, Event studies

JEL Classification: G13, G14, G21, G34

Suggested Citation

Silaghi, Florina and Martin-Oliver, Alfredo and Sewaid, Ahmed, The CDS Market Reaction to Loan Renegotiation Announcements (December 16, 2020). Available at SSRN: https://ssrn.com/abstract=3546561 or http://dx.doi.org/10.2139/ssrn.3546561

Florina Silaghi (Contact Author)

Autonomous University of Barcelona ( email )

Business Department
Bellaterra, Barcelona 08193
Spain

Alfredo Martin-Oliver

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain

Ahmed Sewaid

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

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