TY - JOUR
T1 - The CDS market reaction to loan renegotiation announcements
AU - Silaghi, Florina
AU - Martín-Oliver, Alfredo
AU - Sewaid, Ahmed
N1 - Funding Information:
We are very grateful for insightful comments to two anonymous referees and the editor Geert Bekaert. We also thank Sebastian Bunnenberg, Rafael Matta, Yang Wang, Ran Zhao, as well as conference participants at the Southern Finance Conference 2020, the World Finance & Banking Symposium 2020, the International Risk Management Conference 2020, the 5th SDU Finance Workshop 2020, the IFABS conference 2021 and the Finance Forum 2021 for valuable comments and suggestions. Florina Silaghi, Serra Húnter Fellow, and Alfredo Martín gratefully acknowledge financial support from the Ramón Areces Foundation. This work was also supported through Project ECO2017-86054-C3-1-R from the Spanish Ministry of Economics and Competitiveness, through Project PID2020-115982RB-C21 from the Spanish Ministry of Science and Innovation and through Project 2017SGR 1036 from the Generalitat de Catalunya.
Funding Information:
We are very grateful for insightful comments to two anonymous referees and the editor Geert Bekaert. We also thank Sebastian Bunnenberg, Rafael Matta, Yang Wang, Ran Zhao, as well as conference participants at the Southern Finance Conference 2020, the World Finance & Banking Symposium 2020, the International Risk Management Conference 2020, the 5th SDU Finance Workshop 2020, the IFABS conference 2021 and the Finance Forum 2021 for valuable comments and suggestions. Florina Silaghi, Serra H?nter Fellow, and Alfredo Mart?n gratefully acknowledge financial support from the Ram?n Areces Foundation. This work was also supported through Project ECO2017-86054-C3-1-R from the Spanish Ministry of Economics and Competitiveness, through Project PID2020-115982RB-C21 from the Spanish Ministry of Science and Innovation and through Project 2017SGR 1036 from the Generalitat de Catalunya.
Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2022/5
Y1 - 2022/5
N2 - This paper investigates the impact of loan renegotiations on firms’ credit risk using the CDS market as a measure of credit risk. Using a sample of public US firms for 2010–2017, we document a significant decrease in CDS spreads and returns that we interpret as evidence of a certification effect. The finding suggests that the loan renegotiations are on average beneficial for the firm. The strongest reactions are for material amendments such as line of credit amount or tranche amount. Additionally, we find negative stock market returns, although barely statistically significant. Moreover, we identify an anticipation effect of up to 30 days before the announcement date on the CDS market, possibly due to informed trading by CDS banks of their speculative-rated borrowers’ CDS contracts. Finally, we show that firm-specific CDS returns lead idiosyncratic stock returns, especially around the announcement date and for speculative-rated firms.
AB - This paper investigates the impact of loan renegotiations on firms’ credit risk using the CDS market as a measure of credit risk. Using a sample of public US firms for 2010–2017, we document a significant decrease in CDS spreads and returns that we interpret as evidence of a certification effect. The finding suggests that the loan renegotiations are on average beneficial for the firm. The strongest reactions are for material amendments such as line of credit amount or tranche amount. Additionally, we find negative stock market returns, although barely statistically significant. Moreover, we identify an anticipation effect of up to 30 days before the announcement date on the CDS market, possibly due to informed trading by CDS banks of their speculative-rated borrowers’ CDS contracts. Finally, we show that firm-specific CDS returns lead idiosyncratic stock returns, especially around the announcement date and for speculative-rated firms.
KW - Bank loans
KW - Credit default swaps
KW - Event studies
KW - Renegotiation
UR - http://www.scopus.com/inward/record.url?scp=85124140095&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2022.106431
DO - 10.1016/j.jbankfin.2022.106431
M3 - Article
AN - SCOPUS:85124140095
SN - 0378-4266
VL - 138
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
M1 - 106431
ER -