How do reservation prices impact distressed debt rescheduling?

Résumé En

This paper is the first to investigate rescheduling of distressed corporate debt when both the representative shareholderand the creditor face reservation prices. Parties expect from rescheduling both recovery and growth, but reservationprices are key dimensions to consider in the analysis in order to assess the opportunity and to design the new financial set-up. For reservation price, the creditor may have in mind the liquidation value of the firm he can get by a strict enforcement of his contractual rights in court. The shareholder requires fromrescheduling the recognition of her risky, specific and important (financial and intangible) involvements in the future. To shed light on rescheduling with reservation prices, we develop first a general parsimonious distribution-free structural framework. We derive sufficient conditions for rescheduling to take place and highlight situationswhere no rescheduling can occur. We characterize cases where rescheduling is for the creditor possible but sub-optimal. So the shareholder's reservation price can dramatically restrict the set of possible extensions and it does matter for the creditor. We then restrict our setting to undertake numerical analysis, our benchmark being the canonical rescheduling model of Longstaff (1990). Here, we can explore with simulations feasibility and optimality ofrescheduling for different magnitudes of reservation prices and different firms' profiles.We finally investigate variousconcerns related to rescheduling such as agency costs, exit from no-rescheduling situations and bargaining betweenstakeholders.We also discuss different ways to lower the shareholder's reservation price.