Do coupons protect the firm from creditors exercising the acceleration right?

Jackson, Nathan Robert. (2007). Do coupons protect the firm from creditors exercising the acceleration right? Honours Thesis, School of Business, The University of Queensland.

       
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Author Jackson, Nathan Robert.
Thesis Title Do coupons protect the firm from creditors exercising the acceleration right?
School, Centre or Institute School of Business
Institution The University of Queensland
Publication date 2007
Thesis type Honours Thesis
Total pages 95
Language eng
Subjects 1503 Business and Management
Formatted abstract When a firm violates a debt covenant, the creditors have the right to accelerate the face value of the loan. Acceleration of debt can have a disastrous effect on the firm often requiring the firm to be wound up. This study examines whether corporate debt coupons are used by firms to protect them from creditors exercising the acceleration right. Theoretical models of risky debt are developed using the Stochastic Earnings Valuation Method (SEVM) using the framework presented in Alcock and Mollee (2007). The SEVM model improves on past contingent claim models as it incorporates earnings as the primary source of wealth and uncertainty for the firm.

The theoretical models indicate that the value of the creditor's claim on the firms assets in the event of a covenant violation is reduced when coupons are considered. This result suggested that firms could protect themselves from creditors' exercising the acceleration right in the event of a covenant violation by issuing debt with coupons. To protect themselves from acceleration, firms that are more likely to violate debt covenants would likely issue debt with a larger coupon attached. Furthermore, this relationship is examined empirically on 160 S&P 500 firms representing 572 distinct U.S. public corporate bond issues over the period 1997-2006. Using three measures of firm risk; Standard and Poor's long term issuer credit rating, corporate leverage and maturity, strong evidence is found to support the positive relationship between the likelihood of a firm violating its debt covenants and the coupon rate attached to the debt offering.

 
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Created: Thu, 18 Nov 2010, 16:40:47 EST by Muhammad Noman Ali on behalf of The University of Queensland Library