Admissible Designs of Debt-Equity Swaps for Distressed Firms: Analysis, Limits and Applications
Résumé
This paper reconsiders the design of debt-equity swaps that are common tools to
financially restructure distressed firms. While an ad hoc approach consists in
characterizing a set of three parameters, we demonstrate that a system of two
equations defines admissible designs. Hence, assuming that creditors do not want to
bankrupt the firm nor they want to evict completely current equity holders, we solve
the debt holders' design problem. We then undertake an in-depth analysis of
corresponding solutions and we show that debt-equity swaps can significantly
increase the probability of being reimbursed of the remaining due payment in
the next future.
financially restructure distressed firms. While an ad hoc approach consists in
characterizing a set of three parameters, we demonstrate that a system of two
equations defines admissible designs. Hence, assuming that creditors do not want to
bankrupt the firm nor they want to evict completely current equity holders, we solve
the debt holders' design problem. We then undertake an in-depth analysis of
corresponding solutions and we show that debt-equity swaps can significantly
increase the probability of being reimbursed of the remaining due payment in
the next future.