Insights on debt renegotiation : implications for the corporate and residential housing market.

Summary Despite significant advantages, debt as a source of financing involves the risk of insolvency. Bankruptcy and liquidation of assets come at a high cost not only to the borrower and the lender, but also to society at large. The distress of firms can spread through the economy and cause contagion, and can also involve negative externalities (such as the fall in the price of liquidated assets). Debt renegotiation thus emerges as an alternative to bankruptcy/liquidation, a solution that can be beneficial for all parties involved and for the company. This thesis proposes a theoretical analysis of debt renegotiation in two particular contexts. The first concerns the case of corporate debt. The second concerns the case of mortgage loans. To the best of our knowledge, all models in the literature on corporate debt imply or allow for an infinite number of debt renegotiations. This feature prevents the analysis of the optimal number of renegotiations. To overcome this drawback, we introduce fixed renegotiation costs in a structural model of multiple renegotiations. We analyze the optimal coupon reduction, the timing and the number of renegotiations. With respect to mortgage renegotiation, we contribute to the debate on the current foreclosure crisis by studying first the decision of a lender to renegotiate or foreclose, and second the negative impact of foreclosure on house prices. Finally, the role of credit securitization in decisions to foreclose or renegotiate delinquent debt, as well as the contracts of property managers, are analyzed.