Companies are becoming more eager to push troubled companies into bankruptcy rather than rescue them because of an increase in the use of derivatives, new research has claimed.
According to the FT a study by University of Texas academics Henry Hu and Bernard Black found that debt-holders such as banks and hedge funds stood to gain more from failing companies than ones that survived because of derivatives.
'Investors now accumulate positions in a company by targeting layers of debt or multiple layers of debt. Where their interests lie are less predictable, especially if they also hold credit default swaps. Their financial interests may be best served by forcing a default if they are on the right side of a CDS position,' said Michael Reilly from financial restructuring experts Bingham McCutchen.
The study warns that the breakdown in the relationship between lenders and borrowers threatens the stability of the economy during a credit crunch.
'Spread across the economy, the "freezing" of debtor-creditor relationships can increase systemic financial risk,' the research says.
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