Keywords: Covenants, effective liquidity, multilateral-bargaining, rating boundaries
Abstract: In times of low liquidity for a firm, poison put bondholders can threaten to
either force the company into a reorganization or to raise its borrowing
costs. A multilateral bargaining
solution for the strategic value is formulated at the time of exercise.
Even infinitesimal bondholders, putting non-cooperatively, are able to
extract more than the intrinsic value whenever the amount of putable debt
exceeds the firm's effective liquidity. Prior to the crisis all financial
assets are priced in a continous-time framework when interest rates follow
the Vasicek process and firm's debtholders are subject to a sharp price
decline due to an LBO. The model is calibrated to one such recent crisis
--- that of Kmart Corp.
Full paper (619 KB PDF)
| Full paper (993 KB Postscript)
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