Debt refinancing and credit risk

Santiago Forte ()

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results: A lower value growth generates downgrades and a higher value growth upgrades as expected. However, downgrades will tend to be higher in absolute terms. On the other hand, credit spreads will be independent of the risk free interest rate in the short run, but positively correlated with this rate in the long run.

Date: 2003-03
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:cte:wbrepe:wb031704

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