On the Pricing of Performance Sensitive Debt

86 Pages Posted: 12 Apr 2011 Last revised: 16 Jul 2013

See all articles by Aksel Mjøs

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance

Tor Age Myklebust

Norwegian School of Economics (NHH)

Svein-Arne Persson

Norwegian School of Economics (NHH)

Date Written: May 27, 2013

Abstract

Performance-sensitive debt (PSD) contracts link a loan's interest rate to a measure of the borrower's credit relevant performance, e.g. if the borrower's debt to cash ow ratio deteriorates, the interest rate increases according to a predetermined schedule. We derive and empirically test a pricing model for PSD contracts and nd that interest-increasing contracts are priced reecting the risk of shocks to the credit performance measure, implemented as shocks to borrower debt. Borrowers using such contracts are of higher credit quality compared to borrowers using interest-decreasing contracts, which are priced as if no shocks to borrower debt is present.

Keywords: Performance sensitive debt, credit risk, bank loans, structural debt model, empirical pricing

JEL Classification: G12, G13, G32

Suggested Citation

Mjøs, Aksel and Myklebust, Tor Age and Persson, Svein-Arne, On the Pricing of Performance Sensitive Debt (May 27, 2013). NHH Dept. of Finance & Management Science Discussion Paper No. 2011/5. Available at SSRN: https://ssrn.com/abstract=1804158 or http://dx.doi.org/10.2139/ssrn.1804158

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Tor Age Myklebust (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Svein-Arne Persson

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway
47-55-95-90-00 (Phone)
47-55-95-96-47 (Fax)

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