Do different national codes turn bankruptcy into a strategic tool for companies? And how will changes in the U.S. bankruptcy code affect companies’ borrowing behavior?
Bankruptcy and default risk
Thanks to a U.S. bankruptcy code that favors borrowers, United Airlines has gone nearly three years under Chapter 11 protection without a change of management. That situation is unthinkable in Germany or the United Kingdom, where bankruptcy laws are tougher. But a new U.S. law that goes into effect in October 2005 will make some important changes to the bankruptcy code, such as limiting restructuring to 18 months with no extensions. How will this law affect the U.S. market for corporate debt?
Suresh Sundaresan has studied how the institutional features of markets, particularly bankruptcy codes, influence the behavior of borrowers and lenders. He expects that the new law will change how U.S. companies borrow. They may use less debt, for example, or they may borrow in other currencies and then convert the debt into dollars through interest rate swaps. “For these reasons, it is not easy to predict a spread change,” says Sundaresan. “The situation is complicated by the fact that the Fed is increasing short-term interest rates to slow down the economy.”
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