Debt Refinancing and Credit Risk

Spanish Review of Financial Economics, Vol. 9, Issue 1, pp. 1-10

38 Pages Posted: 10 Oct 2010 Last revised: 19 Jan 2012

Santiago Forte

ESADE Business School, Ramon Llull University

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: July 16, 2010

Abstract

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

Forte, Santiago and Peña, Juan Ignacio, Debt Refinancing and Credit Risk (July 16, 2010). Spanish Review of Financial Economics, Vol. 9, Issue 1, pp. 1-10. Available at SSRN: https://ssrn.com/abstract=1689903

Santiago Forte (Contact Author)

ESADE Business School, Ramon Llull University ( email )

Av. Torreblanca 59
Sant Cugat del Vallès, Barcelona 08172
Spain

HOME PAGE: http://www.santiagoforte.com

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
112
rank
221,978
Abstract Views
834
PlumX