In this paper we build a theoretical model of corporate debt repurchases. First, we find that the firm that buys back its own debt from a creditor must pay a premium over the price at which the same creditor is willing to trade with third parties. This is because the repurchase by a firm leads to a dollar-for-dollar reduction in the amount of cash or assets available to pay the remaining debt. Second, the repurchase price is lower when there are multiple bondholders because of cross-creditor externalities. Therefore, we challenge the view that restructuring more dispersed debt is always more costly to implement. Third, when bankruptcy costs are significant, there is a range of prices below face value at which debt can be repurchased. Fourth, we show that repurchases contribute to flexibility in firms capital structure and increase ex-ante firm value, but have limited power to mitigate debt overhang
