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Sequential Restructuring of Debt Classes, Absolute Priority Violation and Spread Reversals Under Chapter 11

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  • Adriana Breccia
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    Abstract

    Under 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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    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 06/09.

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    Date of creation: May 2006
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    Handle: RePEc:yor:yorken:06/09

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    Keywords: Strategic debt service; bankruptcy; Nash Bargaining; debt priority structure; geometric Brownian motion;

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    1. HEGE, Ulrich & MELLA-BARRAL, Pierre, 2002. "Repeated dilution of diffusely held debt," Les Cahiers de Recherche 751, HEC Paris.
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