Do Bond Holders Lose From Junk Bond Covenant Changes?

This paper documents that firms can and do change the convenants of their public debt indentures through consent solicitations. A game theoretic model of these solicitations shows that they can coercive, i.e. bondholders who cannot coordinate their actions may consent to convenant changes even when it is not in their collective interest to do so. Despite this theoretical finding, abnomral bondholder returns around the announcements of consent solicitations are significantly positive. Further analysis of the data indicates that bondholders can, in fact, coordinate their actions to modify or defeat disadvantageous proposals. As a result, bondholders obtain a portion of the gains resulting from convenant modifications. The public policy implication of these findings is that bondholders do not need additional regulatory or judicial protection in the solicitation process