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The Re-Emergence of Distressed Exchanges in Corporate Restructurings

by Edward I. Altman of New York University, and
Brenda Karlin of New York University

June 30, 2009

Abstract: In 2008 and 2009, bondholders of ailing companies were affected by a reemergence of an important corporate restructuring strategy, known as a Distressed Exchange. Fourteen companies in 2008 completed this desperate attempt to avoid a formal bankruptcy filing - about twice as many as any single year in the last 25 years, involving twice as much in dollar amount than in the entire prior history (1984-2007). And, in just the first four months of 2009, nine firms have already completed distressed exchanges. The recovery rate to bondholders participating in distressed exchanges over the last 25 years is significantly higher than recoveries on other, more dramatic types of default - namely payment defaults and bankruptcies. But, there is no guarantee that a distressed exchange will permanently immunize the firm from further distress, with almost 50% of all companies completing distressed exchanges prior to 2008 ultimately filing for bankruptcy.

Keywords: Distressed Exchange, Corporate Bankruptcy, Defaults, Recoveries at Default.

Published in: Journal of Credit Risk, Vol. 5, No. 2, (Summer 2009), pp. 43-56.

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