Reorganizations and Stochastic Collateral Value

Posted: 24 Jan 2003

See all articles by Royce de Rohan Barondes

Royce de Rohan Barondes

University of Missouri-Columbia School of Law


Bebchuk and Fried propose using a series of auctions to implement a market-based methodology for valuing secured claims in a reorganization. This Article demonstrates their procedure can result in a secured creditor receiving more than its ex ante bargain, and that the probability distribution of possible collateral values can be relevant to fulfilling the ex ante bargain.

This Article further develops and examines a refinement of the Bebchuk and Fried procedure that provides an approximate solution to the overcompensation of secured creditors. This refinement reconceptualizes collateral as comprising two components: (i) a call option on that property, exercisable at the time the secured claim would become due, with an exercise price of the amount that would be due on the secured claim at the corresponding time, and (ii) the property subject to that call option. This Article details how revising the Bebchuk and Fried proposal in light of this insight can yield a market-based methodology that produces an approximation of the ex ante bargain.

Keywords: reorganization, auction, creditors

JEL Classification: G33, K22

Suggested Citation

Barondes, Royce de Rohan, Reorganizations and Stochastic Collateral Value. Available at SSRN:

Royce de Rohan Barondes (Contact Author)

University of Missouri-Columbia School of Law ( email )

Missouri Avenue & Conley Avenue
Columbia, MO MO 65211
United States
573-882-1109 (Phone)
573-882-4984 (Fax)


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