Why Defaulted Bonds Can Trade After Their Scheduled Maturity

Summary

A defaulted bond can continue trading after its stated maturity because default changes the nature of the instrument. The document explains that the bond represents a claim connected to accelerated repayment of principal, while its original maturity date and coupon no longer govern the claim in the usual way. A scheduled maturity therefore need not trigger repayment or make the claim cease to exist.

Trading may continue while bankruptcy or restructuring proceedings determine recovery for creditors. Buyers may believe the eventual recovery will exceed the current market price, or may seek exposure to a possible equity allocation in a reorganized company. These are explanations for why such a claim can retain value and change hands, not a forecast of recovery. The excerpt does not discuss legal terms for particular issues, recovery estimates, or how to price the claim, so the outcome depends on the specific restructuring and seniority of the debt.

Key ideas

• Default can make the scheduled maturity date economically irrelevant to the continuing creditor claim.
• Bondholders may retain rights to recover value through later bankruptcy or resolution proceedings.
• Investors may buy at a low price if they expect recovery to exceed that price.
• A restructuring may exchange creditor claims for equity in the reorganized company.

Tags

# Why would a default bond still being traded 1 year after the maturity date


# Why would a default bond still being traded 1 year after the maturity date












for example, XS0458566071. it is supposed to mature on 21th Oct 2019, but it is still being traded in 2020 with price of around 1 euro

## Answer by Dimitri Vulis (score 5, accepted)

https://quant.stackexchange.com/a/60040

The defaulted bond is a claim on the accelerated repayment of the remaining principal.

The maturity date is a non-event for a defaulted bond.

Its maturity date and the coupon rate are only useful for identifying the bond, but have no economic meaning and in general should not be used in any calculations.

Some IT systems are buggy in that they assume that something special will happen to defaulted bonds on maturity date, such as, they would magically disappear.

## Answer by AlRacoon (score 4)

https://quant.stackexchange.com/a/60039

The owner of the bond at the time of resolution of the default/bankruptcy is entitled to the recovery value. The bankruptcy proceedings may go well past the scheduled maturity of the debt obligations outstanding at the time of default. People that think the recovery value may be higher than the traded price of the bond may be looking for a gain. Also, since the bond holders are senior claims, they will likely be given equity in lieu of their claims. Investors looking to get an equity position on the emergent company may purchase the bonds.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.