Convertible Subordinated Debt Valuation and "Conversion in Distress"
AbstractThis paper presents new formulae for the valuation of convertible debt and shows how it can be rational for convertible holders to convert not only when the debtor's equity value increases, ut also when the debtor approaches distress. Even if debt cannot be enegotiated, "conversion in distress" averts costly bankruptcy. If ankruptcy costs are high, neglecting "conversion in distress" may ntail a significant undervaluation of subordinated convertibles. Conversion in distress" makes convertible debt less sensitive than on-convertible debt to the recovery value of assets in bankruptcy. So onvertible financing can reduce the cost of borrowing when lenders are symmetrically informed about the debtor's assets recovery value.
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Subordinated convertible debt; Default; Bankruptcy costs; "Conversion in distress";
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-11-30 (All new papers)
- NEP-CFN-2003-11-30 (Corporate Finance)
- NEP-RMG-2003-11-30 (Risk Management)
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