Credit Derivatives & the Future of Chapter 11
Am. Bankr. L.J., Vol. 84, No. 4, p. 405, 2007
27 Pages Posted: 5 Jun 2006 Last revised: 3 Mar 2010
Date Written: July 17, 2007
Credit derivatives transfer the default risk of an underlying debt instrument, without transferring legal title. These transactions have several benefits outside of bankruptcy. But once a corporate debtor enters bankruptcy - in particular, chapter 11 - it enters a bargaining process that was bottomed on a model of creditor behavior that may no longer hold because of credit derivatives. A creditor may not act like a traditional creditor if they no longer face the risk of non-payment because that risk has been hedged. In this essay I argue that credit derivatives will substantially alter chapter 11, at least with respect to large corporate debtors.
Keywords: Swaps, Derivatives, Chapter 11, Reorganization, CDS, credit default swaps
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