In 2008, bondholders of ailing companies were affected by a reemergence of an important corporate restructuring strategy, known as a Distressed Exchange. Thirteen 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). 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.
To say that we observed a resurgence in the incidence of DEs in 2008 is really a gross understatement. Indeed, the number of DEs in 2008 (13) was almost double the number of any year since 1984 (Figure 1). The amount of DEs ($29.7 billion) was more than twice the total amount of the years 1984-2007 combined!
The conclusion here is slightly mixed where recoveries on DE are higher than bankruptcy recoveries, but if adjusted for the redefault rate of DEs, one might get a different result.
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