The Financing and Redeployment of Specific Assets

Abstract

We model the role various forms of nonrecourse secured debt play in efficiently redeploying assets whose value is state-specific. Ex ante, an entrepreneur and an asset redeployer make noncontractible state-specific investments in the primary and next-best uses of an asset, respectively. The redeployer provides a secured nonrecourse loan equal to the value of the asset in the critical state that separates the good and bad states. In the event of a bad state, this contract averts ex post bargaining over the asset's quasi-rents on redeployment and leaves the parties' ex ante investments undistorted.IT IS FAIRLY EASY TO F IND examples of assets that were intended for one use and later redeployed to an alternative use. 1950s-era gasoline filling stations are routinely converted into restaurants, convenience stores, and trendy coffee shops. With the decline in worldwide passenger travel during the late 1980s, many older Boeing 747 passenger aircraft were reconfigured for use as air freighters. And with the decline in downtown business occupancies in many American cities during the early 1990s, a large number of older office buildings have been found to make charming and inexpensive hotel conversions. In each of these cases, a substantial portion of the asset's capital cost was devoted specifically to serving its intended use and yet turned out to be worthless. That is, when put in place the assets were specific assets. Moreover, in each case the assets were effectively redeployed to an alternative use after failing in their intended use. This paper examines the role nonrecourse secured debt plays in ensuring the optimal allocation of ownership over specific assets. Early work by Williamson~1975! and Klein, Crawford, and Alchian~1978! on the role of economic organization in avoiding the threat of postcontractual opportunism

Theory and Evidence on the Resolution of Financial Distress

“…These results are unlikely to be explained by the models of Stromberg (2000) and Habib and Johnsen (1999), which predict that defaulted loans are more likely to be liquidated because the incumbent managers are less capable.…”

Leasing and Secondary Markets: Theory and Evidence from Commercial Aircraft

“…In the aircraft market, operating lessors play the role of marketmakers/dealers, and a fringe of smaller companies operate as independent brokers that are sometimes hired to match buyers and sellers. Habib and Johnsen (1999) describe the origin and nature of the leasing business as follows: "[Lessors] appear to have invested substantial resources through the 1980s and early 1990s to establish general knowledge of secondary market redeployment opportunities for used aircraft. They also appear to have invested, ex ante, to establish specific knowledge of redeployment opportunities for particular used aircraft."…”

“…In particular, in the event of default on a lease prior to bankruptcy, a lessor can seize the aircraft more easily than a secured lender can in both U.S. and non-U.S. bankruptcies (Krishnan and Moyer, 1994;Habib and Johnsen, 1999). In U.S.-based Chapter 7 bankruptcies and in most non-U.S. bankruptcies, a lessor can repossess the asset more rapidly than a debt holder (Littlejohns and McGairl, 1998).…”

“…First used in the mid-1970s by ILFC, an aircraft lessor, the operating lease became popular in the mid1980s after airline deregulation in the United States and Europe (Habib and Johnsen, 1999;Gavazza, 2010). The largest lessors are GECAS and ILFC, and not the aircraft manufacturers-Boeing and Airbus-even though both have recently established trading and leasing divisions.…”

The term structure of credit spreads in project finance

“…5. The risk of a project is also determined by the redeployability of its assets (Habib and Johnsen, 1999). A lender's risk is very high if he is faced with very expensive project assets for which there is no alternative use.…”