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Collateral, Renegotiation and the Value of Diffusely Held Debt

Ulrich Hege () and Pierre Mella-Barral

No 1999-94, Discussion Paper from Tilburg University, Center for Economic Research

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.

Keywords: Debt reorganization; multiple creditors (search for similar items in EconPapers)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
Date: 1999
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Working Paper: Collateral, Renegotiation And The Value Of Diffusely Held Debt (2000) Downloads
Working Paper: Collateral, Renegotiation and the Value of Diffusely Held Debt (2000) Downloads
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