What Is a Corporate Debt Market?

Subtitle

Analysis of corporate debt pricing

Right!

Book title

Analysis of corporate debt pricing

Author

Yang Feng

Original name

Corporate debt pricing on contingent debt restructuring

Subtitle

Contingent debt restructuring perspective

Subtitle

Contingent debt restructuring perspective

Foreign title

Corporate debt pricing on contingent debt restructuring

Author of the paper

By Yang Feng

tutor

Lin Qingquan guidance

major

Financial engineering

Degree level

PhD thesis

Degree-granting unit

Renmin University of China

Degree award time

2008

Key words

Corporate debt price bond

Collection number

F276.6

Collection catalog ^[1]

Liabilities are one of the basic characteristics of a company. From the perspective of cash flow, the company can expand the source of funds by issuing debts and provide financial support for the projects the company needs to invest in. From the perspective of company value, since the interest on the debt issued by the company can be deducted as an expense before tax, it can bring certain tax revenue to the company and increase the total value of the company. However, while the issuance of debts brings tax revenue to the company, it will also bring corresponding bankruptcy costs, and as the company's debt scale increases, the company's cash flow pressure to repay debt will continue to increase, thereby increasing the company's probability of default. As a result, the expected present value of bankruptcy costs has also risen. Taking into account the tax benefits and bankruptcy costs brought by debt, the company's financial theory believes that the company may have an optimal debt scale, which is called the optimal leverage ratio, also known as the optimal capital structure. Corporate debt financing can be carried out through indirect and direct methods. The former is mainly bank loans and the latter is corporate bonds. In different countries, the relative proportions of these two types of debt financing vary greatly, mainly depending on whether a country's financial market is market-oriented or bank-oriented. For countries with bank-dominated financing models, like Ben and Germany, the proportion of bank loans in corporate debt financing is relatively high, while the market-dominated countries have the opposite. However, regardless of the importance of the two markets of bank loans and corporate bonds, overall, the company's debt financing market is an important part of a country's financial system, and its size plays an important role in the financial system. Therefore, from a micro perspective, the issue of debt by a company can help it obtain the funds needed for development and increase the value of the company. From a macro perspective, the corporate debt market is an important part of a country's economic and financial system. Together with the equity market, it plays an important role in allocating resources. Because of the huge scale and important role of corporate debt, how to accurately price corporate debt has been one of the focuses of academic research and discussion. However, research in this area is quite difficult, because, unlike risk-free debt, corporate bonds can default and the way to deal with them is very complex. How to define a company's default event and how to consider the value of debt recovery after a default has been the main focus of debate among scholars. According to the differences of different studies on this issue, corporate debt pricing models can be divided into two categories: structural models and simplified models. Among them, the structure model sets a certain diffusion process for the company's asset value, and assumes that the default event is determined endogenously by the model, that is, when the company's asset value drops to a certain threshold, the company's default event occurs. The more typical structural models are Merton (1974), Black and Cox (1976), Leland (1994) and so on. The simplified model completely exogenizes the default event. It is assumed that the default event is the first jump of a Poisson process. The strength of the Poisson process is related to the company's probability of default (which can be obtained from specific data in the financial market). The more typical simplified models are Jarrow, Lando, and Turnbull (1997) and Duffe and Singleton (1999). The model constructed in this paper is an extension of the existing structural model. When existing structural models make assumptions about default events, most of them set the company to go bankrupt and liquidate as soon as a default occurs, and creditors get their liquidation value. In reality, after a company default event, the company's creditors and debtors can make the company continue to operate through debt restructuring and other methods, rather than immediately declare bankruptcy. At present, there are studies that take this factor into consideration, that is, if the company's asset value falls below a certain threshold, a default occurs, but it can continue to survive through debt restructuring and other methods. However, most of the debt restructuring methods they consider are debt-to-equity swaps or strategies. Sexual debt agreements, etc. In fact, there are many ways for companies to carry out debt restructuring, including debt relief, debt extension, etc., and a combination of the above methods can also be used. This article assumes that the company can renew the company's operations through debt restructuring when it defaults, instead of liquidating immediately. Debt restructuring can be debt relief, debt extension, and debt relief and debt-to-equity portfolio. To simplify the analysis, we assume debt restructuring Can only be done once. Based on the existing structural model, we also assume that the movement of the company's asset value satisfies a certain diffusion equation, but there are two thresholds, namely the reorganization threshold and the bankruptcy threshold. When the company's asset value reaches the restructuring threshold, the company performs debt restructuring; because we assume that debt restructuring can only be performed once, when the value of the restructured company reaches the bankruptcy threshold, the company declares bankruptcy and liquidation. In reality, the timing of determining the method of debt restructuring may also differ. For example, the debt restructuring method can be determined in advance when the company is still in a healthy state. As long as the creditors and shareholders negotiate and pass, this is called a prepackaged restructuring plan. Corresponding to this, the restructuring is determined when the company enters financial difficulties. This approach is called private reconciliation. We assume that in the case of a private settlement, the debt relief ratio (or extension period) is determined by the creditor, and the reorganization boundary is determined by the shareholder; in the case of the prepackaged reorganization plan, the creditor and debtor negotiate and jointly determine the restructuring boundary and the reduction ratio (or Extension time). Under the analysis framework of this article, we have obtained the analytical solutions of corporate debt and equity value under different debt restructuring methods (such as debt relief in the case of private settlements), and at the same time analyzed how to determine the specific terms of debt restructuring (such as That is, the choice of the reorganization boundary and the reduction ratio under the debt relief method; the choice of the extension time and the reorganization boundary under the debt extension method). After a comparative static analysis of the endogenous variables, we also discuss the company's optimal capital structure. After analyzing the above corporate debt pricing, we apply the constructed model to the pricing of credit derivatives. Since the credit spread of corporate debt is closely related to the pricing of credit derivatives, if the credit spread of the company changes, the pricing of credit derivatives will be greatly affected. After the consideration of debt restructuring factors is added, the company's debt credit spread will be different, which will affect the pricing of credit derivatives. The first innovation of this article is to add the possibility of debt relief or debt extension in the event of default in the pricing model of corporate debt, thereby constructing a new model. The model obtains an endogenous restructuring boundary and a reduction rate (or delay). the term). We find that after joining the possibility of debt restructuring, the value of the company's debt and equity will rise, which will cause the total value of the company to rise, because the debt restructuring allows creditors and debtors to adjust their liabilities when the company enters financial distress, It is this increased freedom that adds value to the company. The second innovation of this article is the consideration of the choice of debt restructuring methods of the company's shareholders and creditors under the circumstances of private settlement and pre-packaged reorganization plan. After comparing the two situations, we find that the pre-packaged restructuring plan brings a much larger increase in the company's value than the private settlement scenario, which shows that it is valuable to determine the debt restructuring method in advance because it can reduce the uncertainty of the company's operations And thereby increase the value of corporate debt and equity. The third innovation of this article is the consideration of restructuring methods for pricing corporate debt under debt relief and debt-to-equity portfolios. The existing structural models that consider debt restructuring generally assume that the company only adopts a debt restructuring method, such as debt-to-equity swaps. We consider how the company's debt pricing could be affected if the company adopts both approaches. The conclusion shows that compared with the model that only considers debt relief methods, although the value of debt can be increased after joining the debt-to-equity swap, the increase rate is small, because shareholders will make up the value of their losses by increasing the restructuring boundary. This makes the changes in corporate debt and equity value of the company after adding the debt-to-equity hypothesis small, and in general, the total value of the company changes little or even decreases slightly, which shows that the increase in debt restructuring does not necessarily make the company The value increases, and the total value of the company may be negatively affected by conflicts between creditors and debtors. Finally, we apply the constructed model to the pricing of credit default swaps and credit default options. We found that after considering the debt restructuring factors, the company's default probability and default recovery value will both change to a certain extent, which will affect the value of credit derivatives. The pricing model constructed in this paper is an extension of the existing corporate debt pricing structure model and has certain theoretical significance. At the same time, because the model considered in this paper is closer to reality, it can help companies, banks, and investors to analyze and price corporate debt more accurately, which affects their specific market behavior, so it has certain practical significance. In China, the pricing of corporate debt and the credit rating system are not sound due to corporate governance structures and inadequate legal systems. At the same time, due to the company's preference for equity issuance, the development of the corporate bond market has been relatively backward. Methods and theories have been developing relatively slowly. With the continuous deepening of reform and opening up and the continuous improvement of the economic and financial system, China's corporate governance structure will continue to improve, and the corporate bond market will gradually become one of the main ways for companies to conduct external financing, thereby promoting the theoretical research on corporate debt pricing. At the same time, the development of pricing theory has important guiding significance for market participants in the real world, which can make their investment and financing behaviors more reasonable, thereby creating a more suitable investment environment for China. ^[1]