Optimal Capital and Debt Structures with Loss-Absorbing Debts

47 Pages Posted: 24 Oct 2013

See all articles by Sami Attaoui

Sami Attaoui

NEOMA Business School

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

Date Written: October 24, 2013


We analyze a defaultable firm's optimal capital and debt structures when its debt includes senior straight bonds and either Contingent Convertible or Write-Down bonds. The firm's stakeholders bear a liquidity risk prior to the debt maturity and a solvency risk at maturity. Credit events and premature or terminal bankruptcy are triggered if the firm's asset value hits barriers that are endogenously obtained. The optimal capital structure and the optimal senior/loss-absorbing debt mix are jointly determined, in closed form, along with the optimal level of debt reduction in the case of Write-Down debt. The credit spread on the senior debt is shown to be considerably lower when the firm's capital structure also includes loss-absorbing bonds, for a given global leverage. The spreads on the loss-absorbing and senior debts predicted by the model are realistic for plausible values of the exogenous parameters.

Keywords: Capital structure, Debt structure, Contingent convertible bonds, Write-down debt, Credit event, Liquidity risk, Solvency risk

JEL Classification: G13, G32, G33

Suggested Citation

Attaoui, Sami and Poncet, Patrice, Optimal Capital and Debt Structures with Loss-Absorbing Debts (October 24, 2013). Available at SSRN: https://ssrn.com/abstract=2344622 or http://dx.doi.org/10.2139/ssrn.2344622

Sami Attaoui

NEOMA Business School ( email )

Boulevard André Siegfried - BP 215
Mont Saint Aignan, 76825

Patrice Poncet (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
33 1 3443 3000 (Phone)
33 1 3443 3001 (Fax)

Universite Paris I Pantheon Sorbonne ( email )

Finance Department, UFR 06
17 rue de la Sorbonne
75005 Paris
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)

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