by David Perkis*
Derivatives markets have attracted considerable attention recently, in the context of both the global financial crisis and equity derivative use in merger and acquisition activity. Yet limited consideration, especially in Australia, has been afforded to how the use of credit derivatives by lenders may affect the ability of a distressed borrower to restructure its debt. Against a background of increased corporate distress in 2007-2010, this article demonstrates that lenders benefiting from credit derivative protection may act in ways that are not conducive to restructuring. The separation of credit risk from legal ownership of debt increases the likelihood of distressed borrower liquidation and contributes to systemic risk. Although a regulatory response is possible, a commercial approach that does not prejudice the interest of market participants is preferable. Distressed debt investors, far from being “vulture funds”, act to restore the concentration of debt ownership reduced by changes to traditional relationship banking. They also restore the economic incentive to restructuring removed by credit derivative use. Australian restructuring and insolvency practice must facilitate the potential benefits of such investment.
The full article can be accessed here: “Corporate restructuring: The impact of credit derivatives and distressed debt investing” (2010) 21 JBFLP 185.
