Debt Structure and Capital Structure: Based on Bank Debt Renegotiation

Abstract

This paper proposes a model that determines optimal capital and debt structure when a firm uses two types of debt; a bank debt and a bond. Their difference lies in whether a firm can renegotiate with a creditor or not. Renegotiation with bondholders seems to be hard because bonds are dispersively held by many bondholders. So we assume that interest payments to the bank debt can be reduced by the renegotiation when the firm goes worse but those to the bondholders cannot. Benefit of the renegotiation makes the bank debt more favorable. However, since the bank debt accompanies its additional costs, taking account of these trade-off, the firm decides optimal composition of equity, a bank debt, and a bond.