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Defeasance of Control Rights

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Author Info

  • Carsten Bienz

    ()

  • Antoine Faure-Grimaud
  • Zsuzsanna Fluck

    ()

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    Abstract

    We analyse one frequent clause in bonds, covenant defeasance. Covenant defeasance allows the issuer to remove the bond's covenants by placing the remaining payments with a trustee in escrow to be paid out on schedule. We provide theoretical justification for this option and show empirically that it allows inclusion of more covenants in bond issues. We highlight characteristics that make issuers likely to add a defeasance clause. In line with the model's prediction, the empirical analysis documents 13-24 basis points yield reduction for defeasible bonds - annual saving of about $1m, or $11m over the life of the average bond.

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    File URL: http://www2.lse.ac.uk/fmg/workingPapers/discussionPapers/DP679_2011_Defeasance.pdf
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    Bibliographic Info

    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp679.

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    Date of creation: May 2011
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    Handle: RePEc:fmg:fmgdps:dp679

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    Web page: http://www2.lse.ac.uk/fmg/

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    1. Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
    2. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
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