IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Asset financing with credit risk

  • Golbeck, Steven
  • Linetsky, Vadim
Registered author(s):

    This paper develops a model for the unified valuation of all forms of real asset financing, such as bank loans, leases, securitization vehicles, and credit guarantees, secured by assets that generate a stochastic service flow to the operator, or a rental stream to the lessor, and depreciate over a finite economic life to their scrap value. Examples include mobile equipment, such as aircraft, railroad equipment, ships, trucks and trailers, as well as energy generation assets, heavy factory equipment and construction equipment. In the event of obligor default, after a repossession delay and incurring costs of repossession, maintenance, re-marketing and re-deployment, the lender repossesses the asset and sells it on the secondary market and is, thus, subject to the risk of decline in the market value of the asset. The model we develop in this paper treats all forms of asset financing in a unified fashion as contingent claims on the collateral asset and the credit of the borrower. As an application, we estimate the collateral asset model on historical secondary market data for aircraft values and calibrate the financing model to the Enhanced Equipment Trust Certificates (EETCs) issued in 2007 by Continental Airlines and secured by a fleet of new aircraft. We then apply the calibrated model to value private market financing, including bank loans, leases, and credit guarantees, consistently with the capital market financing, and assess the impact of repossession delays on credit spreads. This analysis leads to a policy insight suggesting that bankruptcy laws limiting asset repossession delays lead to lower costs of asset financing.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426612002324
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 37 (2013)
    Issue (Month): 1 ()
    Pages: 43-59

    as
    in new window

    Handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:43-59
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

    References listed on IDEAS
    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.:

    as in new window
    1. Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2008. "Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Paper 0810, Federal Reserve Bank of Cleveland.
    2. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003 246, Society for Computational Economics.
    3. Efraim Benmelech & Nittai K. Bergman, 2010. "Bankruptcy and the Collateral Channel," NBER Working Papers 15708, National Bureau of Economic Research, Inc.
    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. Murillo Campello & Dirk Hackbarth, 2012. "The Firm-Level Credit Multiplier," NBER Working Papers 17805, National Bureau of Economic Research, Inc.
    6. Benmelech, Efraim & Bergman, Nittai K., 2009. "Collateral pricing," Journal of Financial Economics, Elsevier, vol. 91(3), pages 339-360, March.
    7. Andrea L. Eisfeldt & Adriano A. Rampini, 2009. "Leasing, Ability to Repossess, and Debt Capacity," Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1621-1657, April.
    8. Michel A. Habib & D. Bruce Johnsen, 1999. "The Financing and Redeployment of Specific Assets," Journal of Finance, American Finance Association, vol. 54(2), pages 693-720, 04.
    9. Joshua Gallin, 2008. "The Long-Run Relationship Between House Prices and Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 635-658, December.
    10. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
    11. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
    12. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    13. Les Clewlow & Chris Strickland, 1999. "Valuing Energy Options in a One Factor Model Fitted to Forward Prices," Research Paper Series 10, Quantitative Finance Research Centre, University of Technology, Sydney.
    14. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
    15. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7-8), pages 1298-1320.
    16. Gavazza, Alessandro, 2010. "Asset liquidity and financial contracts: Evidence from aircraft leases," Journal of Financial Economics, Elsevier, vol. 95(1), pages 62-84, January.
    17. Clapham, Eric & Gunnelin, Åke, 2003. "Rental Expectations and the Term Structure of Lease Rates," SIFR Research Report Series 16, Institute for Financial Research.
    18. Giesecke, Kay & Weber, Stefan, 2006. "Credit contagion and aggregate losses," Journal of Economic Dynamics and Control, Elsevier, vol. 30(5), pages 741-767, May.
    19. Miller, Merton H & Upton, Charles W, 1976. "Leasing, Buying, and the Cost of Capital Services," Journal of Finance, American Finance Association, vol. 31(3), pages 761-86, June.
    20. Eric Clapham & �ke Gunnelin, 2003. "Rental Expectations and the Term Structure of Lease Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 31(4), pages 647-670, December.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:37:y:2013:i:1:p:43-59. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.