IDEAS home Printed from https://ideas.repec.org/p/yor/yorken/03-18.html
   My bibliography  Save this paper

Convertible Subordinated Debt Valuation and "Conversion in Distress"

Author

Abstract

This 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.

Suggested Citation

  • Marco Realdon, "undated". "Convertible Subordinated Debt Valuation and "Conversion in Distress"," Discussion Papers 03/18, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:03/18
    as

    Download full text from publisher

    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2003/0318.pdf
    File Function: Main text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Craig M. Lewis & Richard J. Rogalski & James K. Seward, 1998. "Understanding The Design Of Convertible Debt," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(1), pages 45-53, March.
    2. Mella-Barral, Pierre & Perraudin, William, 1997. "Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
    3. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    4. Ingersoll, Jonathan Jr., 1977. "A contingent-claims valuation of convertible securities," Journal of Financial Economics, Elsevier, vol. 4(3), pages 289-321, May.
    5. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, August.
    6. Fan, Hua & Sundaresan, Suresh M, 2000. "Debt Valuation, Renegotiation, and Optimal Dividend Policy," The Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 1057-1099.
    7. Pierre Mella-Barral & Pierre Tychon, 1996. "Default Risk in Asset Pricing," FMG Discussion Papers dp250, Financial Markets Group.
    8. Hayne Leland, 2019. "Bond Prices, Yield Spreads, and Optimal Capital Structure with Default Risk," Finance, Presses universitaires de Grenoble, vol. 40(3), pages 45-75.
    9. K. G. Nyborg, 1996. "The use and pricing of convertible bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(3), pages 167-190.
    10. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
    11. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December.
    12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    13. In Joon Kim & Krishna Ramaswamy & Suresh Sundaresan, 1993. "Does Default Risk in Coupons Affect the Valuation of Corporate Bonds?: A Contingent Claims Model," Financial Management, Financial Management Association, vol. 22(3), Fall.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marco Realdon, 2006. "Book Values and Market Values of Equity and Debt," Discussion Papers 06/11, Department of Economics, University of York.
    2. Abel Elizalde, 2006. "Credit Risk Models II: Structural Models," Working Papers wp2006_0606, CEMFI.
    3. Koziol, Christian & Lawrenz, Jochen, 2012. "Contingent convertibles. Solving or seeding the next banking crisis?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 90-104.
    4. Augusto Castillo, 2004. "Firm and Corporate Bond Valuation: A Simulation Dynamic Programming Approach," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(124), pages 345-360.
    5. Dionne, Georges & Laajimi, Sadok, 2012. "On the determinants of the implied default barrier," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 395-408.
    6. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    7. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    8. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    9. Reisz, Alexander S. & Perlich, Claudia, 2007. "A market-based framework for bankruptcy prediction," Journal of Financial Stability, Elsevier, vol. 3(2), pages 85-131, July.
    10. Dumitrescu, Ariadna, 2007. "Valuation of defaultable bonds and debt restructuring," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 94-111, March.
    11. Marco Realdon, 2006. "Valuation of the Firm's Liabilities when Equity Holders are also Creditors," Discussion Papers 06/16, Department of Economics, University of York.
    12. Marco Realdon, "undated". "About Debt and the Option to Extend Debt Maturity," Discussion Papers 03/20, Department of Economics, University of York.
    13. Uhrig-Homburg, Marliese, 2005. "Cash-flow shortage as an endogenous bankruptcy reason," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1509-1534, June.
    14. Marco Realdon, "undated". "Valuation of Put Options on Leveraged Equity," Discussion Papers 03/19, Department of Economics, University of York.
    15. Han, Bing & Zhou, Yi, 2015. "Understanding the term structure of credit default swap spreads," Journal of Empirical Finance, Elsevier, vol. 31(C), pages 18-35.
    16. Belal Ehsan Baaquie & Muhammad Mahmudul Karim, 2023. "Pricing risky corporate bonds: An empirical study," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(1), pages 90-121, January.
    17. Ericsson, Jan & Jacobs, Kris & Oviedo, Rodolfo, 2009. "The Determinants of Credit Default Swap Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 109-132, February.
    18. Sheen X. Liu & Howard Qi & Chunchi Wu, 2006. "Personal Taxes, Endogenous Default, and Corporate Bond Yield Spreads," Management Science, INFORMS, vol. 52(6), pages 939-954, June.
    19. Viral V. Acharya & Jennifer N. Carpenter, 2002. "Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy," The Review of Financial Studies, Society for Financial Studies, vol. 15(5), pages 1355-1383.
    20. Perrakis, Stylianos & Zhong, Rui, 2015. "Credit spreads and state-dependent volatility: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 215-231.

    More about this item

    Keywords

    Subordinated convertible debt; Default; Bankruptcy costs; Conversion in distress;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:yor:yorken:03/18. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Paul Hodgson (email available below). General contact details of provider: https://edirc.repec.org/data/deyoruk.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.