tailieunhanh - Valuation of Defaultable Bonds and Debt Restructuring

In this paper we develop a contingent valuation model for zero-coupon bonds with de- fault. In order to emphasize the role of maturity time and place of the lender s claim in the hierarchy of debt of a Þrm, we consider a Þrm that issues two bonds with different ma- turities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a Þrm on the prices of bonds. We obtain that renegotiation brings about a signiÞcant change in the bond prices and that the effect is dis- persed through different channels: increasing the value of the Þrm, reallocating. | Valuation of Defaultable Bonds and Debt Restructuring Ariadna Dumitrescu Universitat Autònoma de Barcelona First Version September 2001 This Version June 2003 Abstract In this paper we develop a contingent valuation model for zero-coupon bonds with default. In order to emphasize the role of maturity time and place of the lender s claim in the hierarchy of debt of a firm we consider a firm that issues two bonds with different maturities and different seniorage. The model allows us to analyze the implications of both debt renegotiation and capital structure of a firm on the prices of bonds. We obtain that renegotiation brings about a significant change in the bond prices and that the effect is dispersed through different channels increasing the value of the firm reallocating payments and avoiding costly liquidation. Moreover the presence of two creditors leads to qualitatively different implications for pricing while emphasizing the importance of bond covenants and renegotiation of the entire debt. JEL Classification numbers G13 G32 G33. Keywords Debt valuation Defaultable bonds Strategic contingent claim analysis Modigliani-Miller theorem. I am very grateful to Jordi Caballé for his helpful comments and kind guidance. I would like to thank also Ron Anderson Giacinta Cestone David Pérez-Castrillo an anonymous referee and seminar participants at Bank of England ESADE Business School Financial Markets Group LSE Haskayne School of Business HEC Montreal IDEA Microeconomics Workshop IESE Business School Said Business School University College London Universitat Pompeu Fabra Credit 2002 Conference Assesing the Risk of Corporate Default 2002 European Economic Association Meeting the 7th Meeting of Young Economists for their comments. All the remaining errors are my own responsability. Financial support from European Commision PHARE-ACE Programme Grant P97-9177-S is gratefully acknowledged. Correspondence address Ariadna Dumitrescu IDEA Departament d Economia i d Historia .