Empty Creditors And Distressed Debt Exchanges
Speaker(s) Prof. Rajesh Narayanan, Cameron Professor of Finance, E.J. Ourso College of Business, Louisiana State University

Empty creditors – bondholders who insure against default using credit default swap (CDS) contracts, face incentives to holdout from distressed exchanges (DEs) of debt that aim to avoid bankruptcy because their payoffs are higher in bankruptcy. We provide direct evidence that empty creditors act on these incentives and holdout from DEs. Furthermore, we provide evidence that firms structure and execute DEs to mitigate empty creditor holdout, and by doing so, successfully reduce debt through the DE and avoid bankruptcy. Our evidence indicates that the firm’s response to empty creditor holdout is critical to understanding the role of CDS and empty creditors in distress resolution.

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