Collateral, renegotiation and the value of diffusely held debt

Hege, Ulrich and Mella-Barral, Pierre (2000) Collateral, renegotiation and the value of diffusely held debt. Financial Markets Group Discussion Papers (339). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-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.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2000 The Author(s)
Divisions:	Financial Markets Group
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Date Deposited:	29 Jun 2023 12:00
Last Modified:	16 Sep 2023 00:02
URI:	http://eprints.lse.ac.uk/id/eprint/119110

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