Mao, Lei and Tserlukevich, Yuri (2013) Repurchasing debt. Working Paper. Coventry, UK: University of Warwick. WBS Working Paper .

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Abstract

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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Economics -- Mathematical models, Debt, Debtor and creditor , Corporations -- Finance, Debt financing (Corporations)
Series Name:	WBS Working Paper
Publisher:	University of Warwick
Place of Publication:	Coventry, UK
Official Date:	June 2013
Dates:	Date Event June 2013 Completion
Institution:	University of Warwick
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access (Creative Commons)
Funder:	Research Grants Council (Hong Kong, China)

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