Bank Loan Renegotiation and Credit Default Swaps

Abstract

Abstract Using Roberts (2015) loan-level data from 2000 to 2011, we find that the inception of CDS trading on reference firms’ debt is associated with a decreased number and lower probability of amendments, restatements, and rollovers to existing lenders of bank loans. Reference firms are also less likely to terminate loans prematurely or refinance with different lenders after the inception of CDS trading and tend to exhibit longer loan maturities. Our evidence is consistent with the empty creditor problem arising from CDS trading and the resulting decrease in the negotiation power of borrowers. Our research contributes to understanding how financial innovations alter bank-lending relationships.