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Write-Down Bonds and Capital and Debt Structures

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  • Attaoui, Sami
  • Poncet, Patrice

Abstract

We analyze a defaultable firm’s optimal capital and debt structures when its debt includes senior straight and Write-Down (WD) bonds. Credit events and premature or terminal bankruptcy are triggered if the firm’s asset value hits specific barriers. The optimal capital structure and the optimal straight/WD debt mix are jointly determined along with the optimal level of debt reduction. The firm increases its leverage by swapping both equity and straight debt for WD bonds. The credit spread on the straight debt is shown to be considerably lower when the firm’s capital structure also includes WD bonds, for a given global leverage.

Suggested Citation

  • Attaoui, Sami & Poncet, Patrice, 2015. "Write-Down Bonds and Capital and Debt Structures," Journal of Corporate Finance, Elsevier, vol. 35(C), pages 97-119.
    • Handle: RePEc:eee:corfin:v:35:y:2015:i:c:p:97-119
    DOI: 10.1016/j.jcorpfin.2015.08.009
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    Cited by:

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    3. Zhao, Zhiming & Li, Shasha & Tang, Huiling, 2021. "Write-down bonds, credit risk and imperfect information," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).

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    More about this item

    Keywords

    Capital structure; Debt structure; Write-down debt; Credit event; Credit spread;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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