The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect Corporate Borrowing?

The 2005 bankruptcy reform in the United States gave derivatives contracts an effective “supersenior” status. The reform aimed to stabilize the derivatives market and reduce systemic risk. However, we find evidence that the reform unintentionally results in a decline in corporate borrowing for derivatives-using firms: since 2005, derivative users have fewer loans. The loans they have obtained have smaller size, higher loan spreads, more stringent collateral requirements. The effects are more pronounced for those derivatives-using firms that are closer to bankruptcy and those with smaller lending base. Our paper sheds light on the dark side of the 2005 bankruptcy reform and helps clarify conflicts of interest among various types of creditors.