TAILIEUCHUNG - How Long Do Junk Bonds Spend in Default?

This paper analyzes junk bond defaults during 1980 to 1991 to determine which factors affect the length of time spent in default. Bondholder holdouts are not a significant problem, as firms with proportionately more bonds have shorter default spells. In contrast, bank debt is associated with slower restructurings. Bargaining problems arising from contingent liabilities, lawsuits, and size delay the process, although multiple bond classes do not. Neither information problems nor firm value appear to matter. HLTs do not resolve their defaults at a significantly faster pace. Defaults tend to take less time in the 1990s, despite Drexel’s disappearance from the market. THE PLAN TO REPAY THE CREDITORS of the. | THE JOURNAL OF FINANCE VOL. LIV NO. 1 FEBRUARY 1999 How Long Do Junk Bonds Spend in Default JEAN HELWEGE ABSTRACT This paper analyzes junk bond defaults during 1980 to 1991 to determine which factors affect the length of time spent in default. Bondholder holdouts are not a significant problem as f irms with proportionately more bonds have shorter default spells. In contrast bank debt is associated with slower restructurings. Bargaining problems arising from contingent liabilities lawsuits and size delay the process although multiple bond classes do not. Neither information problems nor firm value appear to matter. HLTs do not resolve their defaults at a significantly faster pace. Defaults tend to take less time in the 1990s despite Drexel s disappearance from the market. The plan to repay the creditors of the LTV Corporation was confirmed in June 1993 marking the end of the longest bond default of the modern junk bond market. LTV s bondholders had endured nearly seven years of negotiations that started when the steel company filed for Chapter 11 in the summer of 1986. What caused the renegotiation of LTV s debt to take so long Why could other f irms such as Seaman Furniture resolve their defaults in only a few months Theory suggests that bargaining and coordination problems may slow down the restructuring process . Giammarino 1989 Gertner and Scharfstein 1991 Mooradian 1994 and Roe 1987 . A larger or more disperse group of creditors would add to the opportunities for bargaining. Moreover bondholders in particular are believed to face a holdout problem in exchange offers which could to lead to several rounds of offers. Evidence from Gilson John and Lang 1990 that firms with more bank debt tend to restructure out of court suggests that banks help lead their clients out of default more quickly. Asquith Gertner and Scharfstein 1994 however do not find such a strong role for banks and Chatterjee Dhillon and Ramirez 1996 find The Federal Reserve Bank of New York. I am

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