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Admissible Designs of Debt-Equity Swaps for Distressed Firms: Analysis, Limits and Applications

23 Pages Posted: 13 Dec 2007  

Franck Moraux

Université de Rennes I and CREM

Patrick Navatte

Université de Rennes I

Abstract

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.

Keywords: Contingent Claim Analysis, Debt Equity Swap, Design

JEL Classification: G3, G33, G34

Suggested Citation

Moraux, Franck and Navatte, Patrick, Admissible Designs of Debt-Equity Swaps for Distressed Firms: Analysis, Limits and Applications. Paris December 2007 Finance International Meeting AFFI-EUROFIDAI Paper. Available at SSRN: https://ssrn.com/abstract=1071708 or http://dx.doi.org/10.2139/ssrn.1071708

Franck Moraux (Contact Author)

Université de Rennes I and CREM ( email )

IAE de Rennes
11, rue Jean Macé
Rennes, 35000
France
+33 (0)2 23 23 78 08 (Phone)
+33 (0)2 23 23 78 00 (Fax)

HOME PAGE: http://perso.univ-rennes1.fr/franck.moraux/

Patrick Navatte

Université de Rennes I ( email )

7, Place Hoche
Institut de Gestion de Rennes
35065 Rennes Cedex
France
+33 2 9925 3545 (Phone)
+33 2 9938 8084 (Fax)

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