The Re-Emergence of Distressed Exchanges in Corporate Restructurings

Edward I Altman and Brenda Karlin

Contents

Introduction to 'Lessons from the Financial Crisis'

1.

The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned?

2.

Underwriting versus Economy: A New Approach to Decomposing Mortgage Losses

3.

The Shadow Banking System and Hyman Minsky’s Economic Journey

4.

The Collapse of the Icelandic Banking System

5.

The Quant Crunch Experience and the Future of Quantitative Investing

6.

No Margin for Error: The Impact of the Credit Crisis on Derivatives Markets

7.

The Re-Emergence of Distressed Exchanges in Corporate Restructurings

8.

Modelling Systemic and Sovereign Risks

9.

Measuring and Managing Risk in Innovative Financial Instruments

10.

Forecasting Extreme Risk of Equity Portfolios with Fundamental Factors

11.

Limits of Implied Credit Correlation Metrics Before and During the Crisis

12.

Another view on the pricing of MBSs, CMOs and CDOs of ABS

13.

Pricing of Credit Derivatives with and without Counterparty and Collateral Adjustments

14.

A Practical Guide to Monte Carlo CVA

15.

The Endogenous Dynamics of Markets: Price Impact, Feedback Loops and Instabilities

16.

Market Panics: Correlation Dynamics, Dispersion and Tails

17.

Financial Complexity and Systemic Stability in Trading Markets

18.

The Martingale Theory of Bubbles: Implications for the Valuation of Derivatives and Detecting Bubbles

19.

Managing through a Crisis: Practical Insights and Lessons Learned for Quantitatively Managed Equity Portfolios

20.

Active Risk Management: A Credit Investor’s Perspective

21.

Investment Strategy Returns: Volatility, Asymmetry, Fat Tails and the Nature of Alpha

In 2008 and 2009, bondholders of ailing companies were affected by a re-emergence of an important corporate restructuring strategy, known as a “distressed exchange” (DE). This tactic is usually an attempt by an ailing firm to avoid bankruptcy by proposing a fundamental change in the contractual relationship between a debtor and its various creditor classes and is “voluntarily” agreed upon by a sufficient percentage (usually 90% or more) of relevant creditor claims. While one of the most common and dramatic DEs involves a substitution of lower priority equity securities for debt claims, DEs can also result from a reduction of the effective interest rate on the debt, a subordination of claims, an extension of time to repay the debt or a package of new securities, cash and other securities, that have a total value that is less than the face value of the original debt claim. Another critical component is the condition that the original claim is selling at a distressed price at the time of the DE announcement, usually below 70 cents on the US dollar. The resulting situation is still called a DE even if the price of the existing debt increases after the announcement. The recovery rate to

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