Bondholder Coercion: The Problem of Constrained Choice in Debt Tender Offers and Recapitalizations

The past decade saw the flourishing of risky, high-yield corporate debt, often called junk bonds. Too many companies took on too much debt, and the chickens are now coming home to roost as these bonds have begun to default with increasing frequency.The magnitude of the problem is potentially enormous; by one estimate, $318 billion of debt has either defaulted already or trades at yields indicating the market\u27s skepticism that it will be repaid on maturity. Facing the prospect of default, corporate issuers are seeking to restructure or recapitalize their financial structures at a correspondingly increased pace. The market force driving much of this restructuring is the tendency for debt securities of troubled companies to trade in the secondary market at a fraction of their face amount. Thus the issuer can repurchase these securities (or exchange new securities for them) at levels sometimes as low as twenty-five to thirty percent of their face amount