Collateral, Renegotiation and the Value of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.

Reorganization Law and Dilution Threats in Different Financial Systems

In a market-based financial system, credit is held by dispersed creditors, and out-of-court renegotiation of debt is more likely to fail because of hold-out problems; in a bank-based system, out-of-court renegotiation stands good chances to succeed. Since out-of-court renegotiation is a substitute for court-supervised reorganization, the design of a reorganization law cannot abstract from the financial system. Chapter 11-style renegotiation is shown to benefit public debt firms and to be harmful for private debt firms; the overall effect depends on the financial system, but is likely to be positive only in a market-based system. The case for a reorganization law is weakened if dilution threats like exit consents are taken into account: such a law is then in most cases undesirable. Legislation, however, which jointly introduces a reorganization law while facilitating the use of dilution threats will improve welfare in a market-based system, but reduce welfare in a bank-based system. Thus, the paper indentifies a new determinant in the debate over optimal bankruptcy codes, which is how easily dilution threats can be deployed.Workouts;reorganization law;Chapter 11;financial systems;dilution threats;exit consents;hold-in effect

Collateral, Renegotiation and the Value of Diffusely Held Debt

Debt with many creditors is analyzed in a continuous-time pricing model of the levered firm. We specifically allow for debtor opportunism vis-a-vis a non-coordinated group of creditors, in form of repeated strategic renegotiation offers and default threats. We show that the creditors' initial entitlement to non-collateralized assets will be expropriated through exchange offers. Exchange offers successively increase the level of collateral until all assets are fully collateralized. The ex ante optimal debt contract is neither fully collateralized nor without any collateral. Diffusely held debt allows for a larger debt capacity and bears lower credit risk premia than privately held debt. We derive simple closed-form solutions for the value of equity and defaultable bonds. Numerical estimates show that the bond valuation is very sensitive to the correct specification of the debt renegotiation model.Debt reorganization;multiple creditors

Structure and energetics of ammonia clusters (NH3)n (n=3-20) investigated using a rigid-polarizable model derived from ab initio calculations

An analytical model has been developed to describe the interaction between rigid ammonia molecules including the explicit description of induction. The parameters of the model potential were chosen by fitting high quality ab initio data obtained using second-order Moller-Plesset (MP2) perturbation theory and extended basis sets. The description of polarization effects is introduced by using a noniterative form of the "charge on spring model", the latter accounting for more than 95% of the dipole induction energy and of the increased molecular dipole. Putative global minima for (NH3)(n) (n = 3-20) have been optimized using this new model, the structure and energetics of the clusters with n = 3-5 being found in good agreement with previous ab initio results including electronic correlation. Results for larger species have been compared with previous structural studies where only nonpolarizable models were employed. Our model predicts larger binding energies for any cluster size than previous analytical surfaces, the results often suggesting a reorganization of the relative energy ranking and a different structure for the global minimum

The Role of Industry, Geography and Firm Heterogeneity in Credit Risk Diversification

In theory the potential for credit risk diversification for banks could be substantial. Portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. We propose a model for exploring these dimensions of credit risk diversification: across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity greatly reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity