The Re-Emergence of Distressed Exchanges in Corporate Restructurings

Edward I Altman and Brenda Karlin

In 2008 and 2009, bondholders of ailing companies were affected by a re-emergence of an important corporate restructuring strategy, known as a “distressed exchange” (DE). This tactic is usually an attempt by an ailing firm to avoid bankruptcy by proposing a fundamental change in the contractual relationship between a debtor and its various creditor classes and is “voluntarily” agreed upon by a sufficient percentage (usually 90% or more) of relevant creditor claims. While one of the most common and dramatic DEs involves a substitution of lower priority equity securities for debt claims, DEs can also result from a reduction of the effective interest rate on the debt, a subordination of claims, an extension of time to repay the debt or a package of new securities, cash and other securities, that have a total value that is less than the face value of the original debt claim. Another critical component is the condition that the original claim is selling at a distressed price at the time of the DE announcement, usually below 70 cents on the US dollar. The resulting situation is still called a DE even if the price of the existing debt increases after the announcement. The recovery rate to