Optimal Debt Structure with Multiple Creditors

Patrick Bolton and David Scharfstein

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: Within an optimal contracting framework we analyse some important aspects of debt structure: the number of creditors a company borrows from; the allocation of security interests among creditors; and inter-creditor covenants that govern renegotiation of debt contracts. The key to our analysis is the idea that debt structure affects the outcome of debt renegotiation following a default. Debt structures that lead to ineffecient renegotiation are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. We characterize how the optimal debt structure depends on firm characteristics such as technology, credit rating and the market for its assets.

Keywords: Debt Renegotiation; Security Interests; Priority; Voting Monitoring; Exclusivity (search for similar items in EconPapers)
Date: 1993-03
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