Bondholders with credit default swap protection are likely to be less accommodating in workout negotiations with issuers than those without CDS protection, finds as new report Moody’s Investors Service.

That’s a factor that could lead to more bankruptcy filings.

Moody’s report examines the role of CDS on bondholder preferences in “workout” situations involving distressed issuers. “Although individual circumstances may vary,” says the report’s author, Alexander Yavorsky, senior analyst and vice president. “We believe bondholders that own CDS protection are more likely to take a hard line in negotiations with issuers and may prefer an accelerated bankruptcy to a longer-term going-concern approach, by not agreeing to waive indenture covenants, for instance.”

While a more confrontational stance by bondholders would be expected to accelerate the pace of bankruptcy filings, Moody’s notes that several unrelated factors are having a countervailing impact by limiting other investors’ willingness and ability to trigger abrupt bankruptcies.

“Despite the incentives CDS may create for creditors to prefer bankruptcy over a going-concern option,” Yavorsky notes, “it appears that the effect of this negative influence on the speed of bankruptcy filings is so far being mitigated by other countervailing factors.” These factors include looser covenants relative to prior credit cycles, and the scarcity of ‘debtor-in-possession’ financing, which may make the bankruptcy option unattractive for non-CDS bondholders, it noted.

“The relatively high frequency of distressed exchanges of late indicates that bankruptcy has certainly not become the automatic go-to option for distressed issuers,” Yavorsky points out.

IE