Mardi | 2012-10-23
Franck MORAUX – Florina SILAGHI – Sébastien GALANTI
This paper develops a new model of debt renegotiation in a structural framework that accounts for both taxes and bankruptcy costs. Renegotiation consists of a permanent coupon reduction that occurs at an endogenous renegotiation threshold and that does not decrease the debt value, ensuring creditors to be at worse indifferent. We investigate the size of the optimal coupon reduction and show that the new coupon has to lie in a certain range due to Pareto efficiency and participation constraints. The exact size of the new coupon and the sharing of the renegotiation surplus depend on the bargaining power of claimants. The optimal number of renegotiations is also analyzed. As the renegotiation surplus is rapidly decreasing in the number of renegotiations, and renegotiation costs increase with the number of renegotiations, a firm can only have a limited very small number of renegotiations, which is in line with empirical evidence.