Event Risk: An Analysis of Losses to Bondholders and “Super Poison Put” Bond Covenants



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    • Economist, Board of Governors of the Federal Reserve System. I am indebted to Eric Cohen, Charles Drakos, Gail Hessol, Jean Helwege, Paul Kupiec, Steve Lumpkin, Phillip Mack, James Moser, Peggy Pickering, Steve Prowse, John Rea, Marshal Salant, Steve Sharpe, Chris Turner, seminar participants at the Securities and Exchange Commission's and the Federal Reserve System's Financial Analysis Meeting, Rene Stulz, the editor, and an anonymous referee for their insights and criticisms. Anita Barley, Peter Oberkircher, and Joyce Payne provided careful statistical and research assistance. The analysis and conclusions of this paper are those of the author and do not indicate concurrence by other members of the research staff, by the Board of Governors, or by the Federal Reserve Banks.


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 convenants may have initially reduced 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.