Do Bondholders Lose from Junk Bond Covenant Changes

Marcel Kahan and Bruce Tuckman

The Journal of Business, 1993, vol. 66, issue 4, 499-516

Abstract: This article documents that firms can and do change the covenants of their public debt indentures through consent solicitations. A game-theoretic model shows that bondholders may consent to covenant changes even when it is not in their collective interest to do so. Despite this finding, bondholder returns around solicitations are positive. Further analysis indicates that bondholders coordinate their actions to modify or defeat disadvantageous proposals and, therefore, can demand some of the gains resulting from covenant modifications. The policy implication of this study is that bondholders may not need additional regulatory or judicial protection in the solicitation process. Copyright 1993 by University of Chicago Press.

Date: 1993
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