Sequential Restructuring of Debt Classes, Absolute Priority Violation and Spread Reversals Under Chapter 11

Adriana Breccia

Discussion Papers from Department of Economics, University of York

Abstract: Under U.S. Bankruptcy Code, equity holders can restructure different debt classes at a time. Recognizing this allows us to endogenize, in continuous time, not only the restructuring threshold but also the restructuring order of senior and junior classes. Unlike previous studies, sequential restructuring explains absolute priority violation (APV) not just among debt and equity but also among debt classes. The extent of APV leads to positive credit spreads even if senior creditors are fully secured and virtually immune to default risk. Moreover, sequential restructuring can lead to reversals in the credit spreads. We provide sufficient conditions for avoiding reversals.

Keywords: Strategic debt service; bankruptcy; Nash Bargaining; debt priority structure; geometric Brownian motion (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Date: 2006-05
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.york.ac.uk/media/economics/documents/discussionpapers/2006/0609.pdf Main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:06/09

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().