NERA Economic Consulting Analyzes Allegations of Manufactured Defaults

The National Economic Research Associates ("NERA"), an economic consulting firm, demonstrated in a recent article how economic analysis can be used to assess allegations related to credit default swaps ("CDS") and the creditworthiness of a company.

In an article published by NERA on December 1, 2019, several researchers used an empirical analysis of public data about RadioShack to demonstrate correlations between allegations about the company's operations and credit risk. NERA concluded that its economic analysis does not appear to support an allegation of an opportunistic strategy using credit derivatives or an attempted manufactured default in the case of RadioShack.

NERA found that economic modeling on CDS prices of RadioShack demonstrated that the company's path to bankruptcy was not necessarily facilitated by CDS investors, as claimed by certain unsecured creditors in the bankruptcy proceedings. NERA highlighted that, according to public records, the major lender in a dispute with RadioShack held no CDS position.

NERA said its empirical analysis did not support the contention that CDS investors with purportedly "pervert incentives" led to the bankruptcy of the company. NERA stated that its analysis of CDS prices demonstrates that a dispute with a key secured lender had a significant impact on the company's implied probability of default in the short term. In addition, NERA said its analysis shows that no other unique, company-specific events at the time had a similar impact on RadioShack's CDS prices and the resulting risk of default.

The NERA article was authored by Managing Director Dr. Faten Sabry, Senior Consultant Dr. Ignacio Franceschelli, and Senior Analyst David Cen.