Event Risk: An Analysis of Losses to Bondholders and "Super Poison Put" Bond Covenants

Leland Crabbe

Journal of Finance, 1991, vol. 46, issue 2, 689-706

Abstract: Ten percent of the investment-grade industrial bonds that were associated with major capital restructurings between 1983 and 1988 had already been downgraded to speculative grade as of August 1989. In response to these downgrades and the corresponding wealth losses for bondholders, over 40 percent of recently issued investment-grade industrial bonds are protected from this type of "event risk" by virtue of specialized covenants. These event-risk covenants may have initially reduced interest costs for borrowers by roughly 20 to 30 basis points. However, the magnitude of the effect appears to have declined along with the general decline in corporate restructurings. Copyright 1991 by American Finance Association.

Date: 1991
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