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Market Valuation of Illiquid Debt and Implications for Conflicts Among Creditors

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  • Leonardo Bartolini
  • Avinash K. Dixit

Abstract

We develop a formula for the market value of debt when the borrower’s repayment capacity varies stochastically, and shortfalls are rolled over. The value of a marginal dollar of nominal claim is an S-shaped function of the ratio of the repayment capacity to the amount of nominal debt. Shifts of this curve are examined in response to changes in the underlying parameters. The calculations bring out some conflicts of interest among lenders of differing degrees of seniority. Most surprisingly, junior creditors gain when the loan is rescheduled on terms more favorable to the debtor.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/88.

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Length: 34
Date of creation: 01 Sep 1990
Date of revision:
Handle: RePEc:imf:imfwpa:90/88

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Cited by:
  1. Michael Bowe & James W. Dean, 1997. "Debt-equity swaps and the enforcement of sovereign loan contracts," Journal of International Development, John Wiley & Sons, Ltd., vol. 9(1), pages 59-83.
  2. Michael P. Dooley & Mark R. Stone, 1992. "Endogenous Creditor Seniority and External Debt Values," IMF Working Papers 92/57, International Monetary Fund.
  3. Marcus H. Miller & Lei Zhang, 1999. "Sovereign Liquidity Crisis: The Strategic Case for A Payments Standstill," Working Paper Series, Peterson Institute for International Economics WP99-8, Peterson Institute for International Economics.
  4. Sven Steinkamp & Frank Westermann, 2012. "On Creditor Seniority and Sovereign Bond Prices in Europe," CESifo Working Paper Series 3944, CESifo Group Munich.
  5. Pierre Mella-Barral & Pierre Tychon, 1996. "Default Risk in Asset Pricing," FMG Discussion Papers, Financial Markets Group dp250, Financial Markets Group.
  6. Claessens, Stijn & van Wijnbergen, Sweder, 1990. "Pricing average price options for the 1990 Mexican and Venezuelan recapture clauses," Policy Research Working Paper Series 541, The World Bank.
  7. Claessens, Stijn & Pennacchi, George, 1992. "Deriving developing country repayment capacity from the market prices of sovereign debt," Policy Research Working Paper Series 1043, The World Bank.
  8. Hayri, Aydin, 1997. "Debt Relief," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1701, C.E.P.R. Discussion Papers.
  9. Loredana Ureche-Rangau & Kim Oosterlinck, 2005. "Entre la peste et le choléra : le détenteur d’obligations peut préférer la répudiation au défaut…," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 79(2), pages 309-331.
  10. Cohen, Daniel, 1996. "The sustainability of African debt," Policy Research Working Paper Series 1621, The World Bank.

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