DO BONDHOLDERS LOSE FROM JUNK BOND COVENANT CHANGES

This article documents that firms can and do change the covenants of t heir public debt indentures through consent solicitations. A game-theo retic model shows that bondholders may consent to covenant changes eve n when it is not in their collective interest to do so. Despite this f inding, bondholder returns around solicitations are positive. Further analysis indicates that bondholders coordinate their actions to modify or defeat disadvantageous proposals and therefore can demand some of the gains resulting from covenant modifications. The policy implicatio n of this study is that bondholders may not need additional regulatory or judicial protection in the solicitation process.