Working title : "Going concern with empty creditors – legal and economic analysis of the role of debt decoupling in corporate governance"
The pricing and financial structure of credit derivatives, in particular credit default swaps (CDS), generally assumes that the underlying entity remains unaffected by credit derivatives contracts. Nonetheless, these contracts have a wide impact on the reference entity, specifically on group of companies in case of default events (encompassing the whole range of possible event from financial distress to restructuring and bankruptcy). If this influence may be reflected in company’s or group of companies’ performance (in particular its financing operations), it may have greater and wide-reaching legal consequences, as it may completely transform a company’s (and in particular under this aspect a group of company) strategic behavior to the extent that these firms face creditors having a completely new structure of incentives.
This thesis will focus more specifically on debt decoupling issues that arise when creditors of a company have hedged their risks against default through the conclusion of derivative contracts but retain control rights in and outside bankruptcy. In specific situation, creditors may tend to over-hedge their exposure which gives raise to an higher incidence of costly bankruptcy and may condemn the restructuring process to failure.
This situation entails a number of legal and economic issues, which are identified and analysed in the present dissertation project. In particular, a going concern is that market participants are not informed about the economic interest of the actors involved in the restructuring process and no distinction is made in insolvency law between empty creditors and creditors that have a genuine interests to preserve economic value. This thesis will analyze the existing problems and tensions in the current legal framework and, when applicable, attempt to provide normative guidance to tackle these issues. This dissertation intends to develop perspectives on these issues with a particular consideration of the Swiss and US legal frameworks.