Debt Refinancing and Credit Risk
Spanish Review of Financial Economics, 2011, Vol. 9, 1-10.
38 Pages Posted: 10 Oct 2010 Last revised: 14 Feb 2023
Date Written: July 16, 2010
Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results: A lower firm value growth generates downgrades and a higher firm value growth generates upgrades, as expected. However, downgrades tend to be higher in absolute terms. We also find that the inverse relation between credit spreads and risk free rate that structural models usually predict still holds in this setting, but only in the short run. This negative relation will turn to be null in the medium run and positive in the long run.
Keywords: Refinancing Contract, Credit Rating, Credit Spreads
JEL Classification: G12, G13, G32
Suggested Citation: Suggested Citation