Dynamic Capital Structure and the Contingent Capital Option

Barucci, Emilio; Viva, Luca Del

doi:10.2139/ssrn.1685424

Cited by 16 publications

(11 citation statements)

References 16 publications

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“…Concerning the second area of research, Barucci and Del Viva (2011) extends an approach originally proposed by Goldstein et al (2001) where the underlying state variable is the claim to earnings before interest and taxes (EBIT) and where straight debt, contingent capital, equity and bankruptcy costs are modeled as perpetual assets, thus allowing for closed-form valuation formulas. The default barrier level, the trigger level and the optimal capital structure are then calculated such as to maximize the equity value and the net value of the company.…”

Section: This Paper and Earlier Literaturementioning

confidence: 99%

Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models

Brigo

Garcia²,

Pede

2013

SSRN Journal

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After the beginning of the credit and liquidity crisis, financial institutions have been considering creating a convertible-bond type contract focusing on Capital. Under the terms of this contract, a bond is converted into equity if the authorities deem the institution to be under-capitalized. This paper discusses this Contingent Capital (or Coco) bond instrument and presents a pricing methodology based on firm value models. The model is calibrated to readily available market data. A stress test of model parameters is illustrated to account for potential model risk. Finally, a brief overview of how the instrument performs is presented.

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Section: This Paper and Earlier Literaturementioning

confidence: 99%

Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models

Brigo

Garcia²,

Pede

2013

SSRN Journal

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“…Barucci and Del Viva (2012) study the optimal capital structure of a bank issuing countercyclical contingent capital. Barucci and Del Viva (2013) extend their previous work to the case with dierent conversion rules. De Spiegeleer and Schoutens (2012, 2013) study CoCo issues with multiple triggers spread across a range of trigger levels.…”

Section: Introductionmentioning

confidence: 64%

How do capital structure and economic regime affect fair prices of bank’s equity and liabilities?

2016

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This paper considers the capital structure of a bank in a continuous-time regime-switching economy. The modeling framework takes into account various categories of instruments, including equity, contingent convertible debts, straight debts, deposits and deposits insurance. Whereas previous researches concentrate on the determination of the capital structure that maximizes shareholders' equity, this work focuses on the fair pricing of liabilities that ensures no cross-subsidization among stakeholders. This is discussed in a case study where the bank's EBIT is modeled by a four-regime process and is tted to real market data. A numerical analysis reveals that convertible debts can signicantly reduce the cost of deposits insurance and straight debts as well as probabilities of bankruptcy. Although it is found that the risk of dilution for shareholders is important, paradoxically, a high conversion rate for the contingent convertible debt, compensated by a low interest cost before conversion, can delay this dilution. Finally, we nd that in case of change of economic regime, there exists an optimal capital structure from the shareholder's perspective.

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“…In addition, if = = 0 in (25), i.e., CCS is not effectively included in the capital structure, or if we let → +∞, i.e., CCS is simplified into CoCo, we therefore recover from (25) a standard conclusion in corporate finance theory. That is, the optimal bankruptcy threshold * is given by: * = (1 − )( − ) + ( + + 1) , which is also derived by Barucci and Viva (2013).…”

Section: Endogenous Default Timingmentioning

confidence: 94%

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

Cai

Yang

Zhao

2018

Euro Fin Management

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This paper introduces a new form of contingent capital, contingent convertible securities (CCSs), which might repeatedly convert between debt‐ and equity‐like instruments depending on financial conditions. We derive explicit prices of corporate securities, assuming the cash flow is modeled as a geometric Brownian motion. We present an explicit value of the increased tax shields due to CCSs. We provide an explicit optimal capital structure when CCSs are issued and interestingly, the ratio of the optimal straight bond coupon to CCS coupon is constant and independent of the firm's financial conditions. All the conclusions hold true also for contingent convertibles.

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Dynamic Capital Structure and the Contingent Capital Option

Cited by 16 publications

References 16 publications

Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models

Coco Bonds Valuation with Equity- and Credit-Calibrated First Passage Structural Models

How do capital structure and economic regime affect fair prices of bank’s equity and liabilities?

Contingent capital with repeated interconversion between debt‐ and equity‐like instruments

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