Even risk: an analysis of losses to bondholders and "super poison put" bond covenants

Article Abstract:

Ten percent of the investment-grade industrial bonds that were associated with major capital restructurings between 1983 and 1988 had already been downgraded to speculative grade as of August 1989. In response to these downgrades, and the corresponding wealth losses for bondholders, over 40 percent of recently issued investment-grade industrial bonds are protected from this type of "event risk" by virtue of specialized covenants. These event-risk covenants may have initially reduce interest costs for borrowers by roughly 20 to 30 basis points. However, the magnitude of the effect appears to have declined along with the general decline in corporate restructurings. (Reprinted by permission of the publisher.)

Covenants, Bondholders

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The default premium and corporate bond experience

Article Abstract:

The development of organized markets for speculative-grade corporate debt has provided financial researchers with an opportunity to examine the pricing of default risk. By incorporating previous work on the default experience of low-rated corporate debt, this paper presents an introduction to risk-neutral models of risk-bond pricing and uses these to examine the relationship between the default premium embodied in bond yields and actual default rates. The contribution of macroeconomic information to the default premium is also examined. The author finds that holders of low-grade bonds have, on average, been compensated for losses due to default. (Reprinted by permission of the publisher.)

Research, Debt financing (Corporations), Debt financing

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The effect of Three Mile Island on utility bond risk premia: a note

Article Abstract:

The Three Mile Island accident provoked changes on the utility bonds' risk premia. A duration-based measure of the risk premium is the model used to evaluate the effect on such premia. Results indicate that the industry as a whole experienced an increase in risk premia after the Three Mile Island accident.

Electric utilities, Finance, Investments, Nuclear energy, Public utilities

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