Sequential Restructuring of Debt Classes, Absolute Priority Violation and Spread Reversals Under Chapter 11
AbstractUnder U.S. Bankruptcy Code, equity holders can restructure different debt classes at a time. Recognizing this allows us to endogenize, in continuous time, not only the restructuring threshold but also the restructuring order of senior and junior classes. Unlike previous studies, sequential restructuring explains absolute priority violation (APV) not just among debt and equity but also among debt classes. The extent of APV leads to positive credit spreads even if senior creditors are fully secured and virtually immune to default risk. Moreover, sequential restructuring can lead to reversals in the credit spreads. We provide sufficient conditions for avoiding reversals.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 06/09.
Date of creation: May 2006
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Strategic debt service; bankruptcy; Nash Bargaining; debt priority structure; geometric Brownian motion;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-03 (All new papers)
- NEP-FIN-2006-06-03 (Finance)
- NEP-FMK-2006-06-03 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ulrich Hege & Pierre Mella-Barral, 2005.
"Repeated Dilution of Diffusely Held Debt,"
The Journal of Business,
University of Chicago Press, vol. 78(3), pages 737-786, May.
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