FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies
A distressed issuer wants to restructure its bonds out of court. Which of the following features of the exchange offer would most effectively reduce the holdout problem?
Exit consents most effectively reduce holdouts. Tendering bondholders vote to strip covenants and protections from the old bonds, which makes remaining untendered bonds less valuable and gives holders an incentive to participate in the exchange rather than free-ride.
- AOffering identical terms to all holders with no conditions
- BIncluding exit consents that strip protective covenants from the old bonds for those who do not tenderCorrect
- CPromising holdouts a better recovery if they wait
- DExtending the offer period indefinitely
Explanation
Exit consents let tendering holders vote to remove covenants or protections from the old bonds, making the untendered bonds less attractive and penalizing holdouts. The other choices either reward waiting or do not change incentives.
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