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How do firms respond to empty creditor holdout in distressed exchanges?

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  • Narayanan, Rajesh
  • Uzmanoglu, Cihan

Abstract

Empty creditors—bondholders hedged with Credit Default Swaps (CDSs)—face incentives to holdout from “Distressed Exchanges” (DEs) of debt because the CDS hedge alters their payoffs to favor bankruptcy. We show using detailed data on DEs that firms respond to this holdout problem by targeting junior bondholders who are more likely to tender than senior bondholders. Furthermore, we show that doing so allows them to successfully reduce debt through the DE and avoid bankruptcy. Our evidence underscores the importance of the firm's response to the holdout problem in understanding the role of empty creditors in distress resolution.

Suggested Citation

  • Narayanan, Rajesh & Uzmanoglu, Cihan, 2018. "How do firms respond to empty creditor holdout in distressed exchanges?," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 251-266.
    • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:251-266
    DOI: 10.1016/j.jbankfin.2018.08.004
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    More about this item

    Keywords

    Credit default swaps (CDSs); Empty creditors; Debt restructuring; Distressed exchange; Bankruptcy; Holdout problem; Financial distress;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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