Repeated Dilution of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous‐time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt cont...

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Published in:	The Journal of business (Chicago, Ill.) Vol. 78; no. 3; pp. 737 - 786
Main Authors:	Hege, Ulrich, Mella‐Barral, Pierre
Format:	Journal Article
Language:	English
Published:	Chicago The University of Chicago Press 01-05-2005 University of Chicago, acting through its Press University of Chicago Press
Subjects:	Bargaining Business administration Business management Company insolvency Contracts Coupons Credit co-operatives Credit systems Creditors Creditors rights Debt Debt contracts Debt management Debt repayment Dilution domain_shs.gestion.fin Economic models Exchange offers Financial assets Financial management Humanities and Social Sciences Liquidation value Public debt Secured debt Shareholders Studies Tariff negotiations Debt Pricing Multiple Creditors Debt Reorganization Priority of Claims
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Abstract	Debt with many creditors is analyzed in a continuous‐time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt contract, this security is provided by assets that gradually become worthless as the firm approaches the preferred liquidation conditions. Dispersed debt offers larger debt capacity than single‐creditor debt and is preferable if the ex ante value of collateralizable assets is sufficiently low. Our model explains credit risk premia in excess of those supported by a single creditor with opportunistic renegotiation.
AbstractList	Debt with many creditors is analyzed in a continuous‐time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt contract, this security is provided by assets that gradually become worthless as the firm approaches the preferred liquidation conditions. Dispersed debt offers larger debt capacity than single‐creditor debt and is preferable if the ex ante value of collateralizable assets is sufficiently low. Our model explains credit risk premia in excess of those supported by a single creditor with opportunistic renegotiation. Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt contract, this security is provided by assets that gradually become worthless as the firm approaches the preferred liquidation conditions. Dispersed debt offers larger debt capacity than single-creditor debt and is preferable if the ex ante value of collateralizable assets is sufficiently low. Our model explains credit risk premia in excess of those supported by a single creditor with opportunistic renegotiation. Reprinted by permission of the University of Chicago Press. © All rights reserved Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm with opportunistic renegotiation offers and default threats. Dispersed creditors accept coupon concessions only in exchange for guaranteed liquidation rights, like collateral. In the ex ante optimal debt contract, this security is provided by assets that gradually become worthless as the firm approaches the preferred liquidation conditions. Dispersed debt offers larger debt capacity than single-creditor debt and is preferable if the ex ante value of collateralizable assets is sufficiently low. Our model explains credit risk premia in excess of those supported by a single creditor with opportunistic renegotiation. [PUBLICATION ABSTRACT]
Author	Mella‐Barral, Pierre Hege, Ulrich
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SubjectTerms	Bargaining Business administration Business management Company insolvency Contracts Coupons Credit co-operatives Credit systems Creditors Creditors rights Debt Debt contracts Debt management Debt repayment Dilution domain_shs.gestion.fin Economic models Exchange offers Financial assets Financial management Humanities and Social Sciences Liquidation value Public debt Secured debt Shareholders Studies Tariff negotiations
Title	Repeated Dilution of Diffusely Held Debt
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