Ten percent of the investment-grade industrial bonds that were associated with major capital restructurings between 1-983 and 1988 had already been downgraded to speculative grade as of August 1989. In response to these downgrades, and the corresponding wealth losses for bondholders, over 40 percent of recently issued investment-grade industrial bonds are protected from this type of by virtue of specialized covenants. These event-risk convenants may have initially reduced interest costs for borrowers by roughly 20 to 30 basis points. However, the magnitude of the effect appears to have declined along with the general decline in corporate restructurings. THE WAVE OF CORPORATE restructurings in the 1980s' and the accompanying expansion of debt gave rise to a marked deterioration in credit quality in the corporate bond market. The financing of the restructurings typically included new debt with a priority equal to or higher than that of the firm's outstanding bonds. As a result of the increase in risk, billions of dollars in outstanding bonds were downgraded from investment grade to speculative grade.' In the process, investors became increasingly concerned with event risk-the risk of a substantial decline in the market price of a firm's outstanding bonds arising from an unforeseen and major change in its capital structure. Since late 1988, several corporate bond offerings have included event-risk covenants as a safeguard against leverage-induced losses. Most of the covenants are ''super poison puts, which give investors the right to sell their bonds back to the issuer at par in the event of a leveraged restructuring and subsequent downgrading to speculative grade.

Ten percent of the investment‐grade industrial bonds that were associated with major capital restructurings between 1983 and 1988 had already been downgraded to speculative grade as of August 1989. In response to these downgrades, and the corresponding wealth losses for bondholders, over 40 percent of recently issued investment‐grade industrial bonds are protected from this type of “event risk” by virtue of specialized covenants. These event‐risk convenants may have initially reduced interest costs for borrowers by roughly 20 to 30 basis points. However, the magnitude of the effect appears to have declined along with the general decline in corporate restructurings.

Diamond (1991) argues that a firm's reputation determines whether it borrows directly or through an intermediary. We test the Diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade. From 1986 to 1991, cumulative abnormal declines averaged 6.69 percent in the first two weeks after the downgrade and 11.05 percent in the subsequent 12 weeks. In contrast to commercial paper issued by bank holding companies, large CDs issued by affiliated banks did not change significantly in the period around a downgrade, suggesting that deposit insurance may have removed market discipline from the CD market.

Leland E. Crabbe, Christopher M. Turner, Does the Liquidity of a Debt Issue Increase with Its Size? Evidence from the Corporate Bond and Medium-Term Note Markets, The Journal of Finance, Vol. 50, No. 5 (Dec., 1995), pp. 1719-1734

To investigate the liquidity of large issues, this study tests for yield differences between corporate bonds and medium‐term notes (MTNs). In the sample, MTNs have an average issue size of $4 million, compared with $265 million for bonds. Among MTNs that have the same issuance date, the same maturity date, and the same corporate issuer, we find no relation between size and yields. Moreover, bonds and MTNs have statistically equivalent yields. Thus, rather than suggesting that large issues have greater liquidity, these findings indicate that large and small securities issued by the same borrower are close substitutes.