Poison Bonds
Corporate bonds with a poison put covenant, which we refer to as “poison bonds”, first appeared during the hostile takeover wave in the 1980s. A poison put covenant grants bondholders the right to demand immediate repayment of the bond in a change-of-control event. Originally designed to protect bondholders from potential wealth transfer following leveraged buyouts, […]
Rex Wang Renjie is an Assistant Professor of Finance at the Vrije Universiteit Amsterdam and Tinbergen Institute; and Shuo Xia is an Assistant Professor of Finance at Halle Institute for Economic Research and Leipzig University. This post is based on their paper. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian A. Bebchuk; Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian A. Bebchuk and Robert J. Jackson, Jr.; and What Matters in Corporate Governance? (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell.
Corporate bonds with a poison put covenant, which we refer to as “poison bonds”, first appeared during the hostile takeover wave in the 1980s. A poison put covenant grants bondholders the right to demand immediate repayment of the bond in a change-of-control event. Originally designed to protect bondholders from potential wealth transfer following leveraged buyouts, this covenant soon became an effective takeover defense strategy, primarily used by high-yield issuers in the 80’s and 90’s (Billett, Jiang, and Lie, 2010). However, a significant shift has occurred in this market since the mid-2000s. As shown in Figure 1, the fraction of poison bonds among new issues increased substantially around 2005, predominantly driven by investment-grade (IG) issues. Before 2005, poison bonds accounted for less than 10% of IG issues, but after 2005, they represented over 60% of all new IG issues. In our paper, we investigate the cause behind this trend and examine its impact on shareholder value.
