The dynamics of default and debt reorganization

Mella‐Barral, Pierre

doi:10.1093/rfs/12.3.535

Cited by 75 publications

(35 citation statements)

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“…This paper examines the optimal debt renegotiation strategy of an opportunistic debtor facing a non-coordinated group of creditors in a continuous-time model of the levered firm. The set-up of the model is adapted from Mella-Barral (1999) to allow for multiple creditors and the tax advantage of debt. We allow for a rich set of actions at the discretion of the debtor and study strategies of repeated debt exchange offers and dilution threats.…”

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confidence: 99%

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Repeated Dilution of Diffusely Held Debt

Hege¹,

Mella‐Barral²

2005

J BUS

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Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm in the presence of corporate taxes. We specifically allow for debtor opportunism in form of repeated strategic renegotiation offers and default threats. Dispersed creditors will only accept coupon concessions in exchange for guaranteed liquidation rights, e.g. collateral. The ex ante optimal debt contract is secured with assets which gradually become worthless as the firm approaches the preferred liquidation conditions, in order to allow for sufficient, but delayed renegotiability. Compared with singlecreditor debt, dispersed debt offers a larger debt capacity, and it is preferable ex-ante if the value of collateralizable assets is then reduced. Our model can explain credit risk premia in excess of those supported by a single creditor model with opportunistic renegotiation. Financial support for this project from the Financial Markets Group at the LSE and the hospitality of Tilburg University is gratefully acknowledged. We are grateful to seminar audiences at Aarhus, ESSEC, Groningen, LSE, Queen Mary and Westfield London, Mannheim, Odense, Rotterdam, Tilburg, Vienna, the CEPR Financial Markets Conference in Louvain-la-Neuve, and the CEPR Corporate Finance Conference in Courmayeur for helpful comments. We also wish to thank Sudipto Bhattacharya, Lara Cathart, Jon Danielsson, Darrell Duffie, Jan Ericsson, Martin Hellwig, David Webb and an anonymous referee for useful comments and advise. Any errors remain our responsibility.

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confidence: 99%

“…The set-up so far is the same as in Mella-Barral (1999), with the only difference that we consider taxes. This similarity is deliberate since it will allow for a direct comparison of the results, and hence for an analysis of the differences between a firm choosing to finance with private debt and a firm issuing publicly traded debt.…”

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confidence: 99%

Repeated Dilution of Diffusely Held Debt

Hege¹,

Mella‐Barral²

2005

J BUS

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“…4 Strategic default refers to a debtor's incentive not to repay the full amount of credit in order to force lenders to forgive (part of the) debt (Bolton and Scharfstein [1990]; Mella-Barral [1999]). In contrast to Bolton and Scharfstein [1996], Bergloef et al [2008] prove that imperfect renegotiation may also lead to increasing incentives to default strategically along with a larger number of creditors.…”

Section: Related Literaturementioning

confidence: 99%

Is There a Hold-Up Benefit in Heterogeneous Multiple Bank Financing?

Bannier

2009

SSRN Journal

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“…Anderson and Sundaresan (1996), Mella-Barral and Perraudin (1997), Mella-Barral (1999), Christensen, Flor, Lando, and Miltersen (2014)). Mao and Tserlukevich (2015) present a model where non-coordinated debt holders may accept repurchase offers below the market price when firms pay with existing safe assets or cash.…”

Section: Introductionmentioning

confidence: 97%