Working Paper: NBER ID: w15708
Authors: Efraim Benmelech; Nittai K. Bergman
Abstract: Do bankrupt firms impose negative externalities on their non-bankrupt competitors? We propose and analyze a collateral channel in which a firm's bankruptcy reduces collateral values of other industry participants, thereby increasing the cost of external debt finance industry wide. To identify this collateral channel, we use a novel dataset of secured debt tranches issued by U.S. airlines which includes a detailed description of the underlying assets serving as collateral. Our estimates suggest that industry bankruptcies have a sizeable impact on the cost of debt financing of other industry participants. We discuss how the collateral channel may lead to contagion effects which amplify the business cycle during industry downturns.
Keywords: bankruptcy; collateral channel; cost of debt financing; airlines
JEL Codes: E32; E44; G01; G12; G33; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bankruptcy of an airline (G33) | Reduction in collateral values of similar assets across the industry (G33) |
| Reduction in collateral values of similar assets across the industry (G33) | Increase in cost of debt capital for nonbankrupt firms (G32) |
| Bankruptcy of an airline (G33) | Increase in cost of debt capital for nonbankrupt firms (G32) |
| Increase in the number of bankrupt potential buyers (K35) | Higher credit spreads (G19) |
| Bankruptcy of an airline (G33) | Larger price declines in tranches secured by collateral with potential buyers in bankruptcy (G33) |
| Bankruptcy of an airline (G33) | More pronounced effect for junior tranches and higher loan-to-value (LTV) ratios (F65) |