Working Paper: CEPR ID: DP2417
Authors: Ulrich Hege; Pierre Mellabarral
Abstract: Debt with many creditors is analysed in a continuous-time pricing model of the levered firm.We specifically allow for debtor opportunism vis-à-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.
Keywords: debt reorganization; multiple creditors
JEL Codes: G12; G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debtor's actions (making exchange offers) (G33) | Decrease in creditors' perceived value of their claims (G33) |
| Lack of coordination among creditors (G33) | Holdout behavior (C79) |
| Holdout behavior (C79) | Success of debt restructuring efforts (G33) |
| Opportunistic behavior of shareholders (G34) | Dilution of creditor rights (G33) |
| Debt contracts that are not fully collateralized (G33) | Greater debt capacity and lower credit risk premia (G32) |
| Incorrect model specifications (C52) | Substantial pricing errors in the valuation of bonds (G12) |