Debt refinancing and credit risk

S. Forte Arcos; Juan Ignacio Peña

doi:10.1016/j.srfe.2010.10.001

Debt refinancing and credit risk

S. Forte Arcos^*
, Juan Ignacio Peña

^*Corresponding author for this work

Research output: Indexed journal article › Article › peer-review

4 Citations (Scopus)

Abstract

Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results. A lower firm value growth generates downgrades and a higher firm value growth generates upgrades, as expected. However, downgrades tend to be higher in absolute terms. We also find that the inverse relation between credit spreads and risk free rate that structural models usually predict still holds in this setting, but only in the short run. This negative relation will turn to be null in the medium run and positive in the long run.

Original language	English
Pages (from-to)	1-10
Number of pages	10
Journal	Spanish Review of Financial Economics
Volume	9
Issue number	1
DOIs	https://doi.org/10.1016/j.srfe.2010.10.001
Publication status	Published - Jan 2011
Externally published	Yes

Keywords

Credit rating
Credit spreads
Refinancing contract

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10.1016/j.srfe.2010.10.001

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title = "Debt refinancing and credit risk",

abstract = "Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results. A lower firm value growth generates downgrades and a higher firm value growth generates upgrades, as expected. However, downgrades tend to be higher in absolute terms. We also find that the inverse relation between credit spreads and risk free rate that structural models usually predict still holds in this setting, but only in the short run. This negative relation will turn to be null in the medium run and positive in the long run.",

keywords = "Credit rating, Credit spreads, Refinancing contract",

author = "\{Forte Arcos\}, S. and Pe{\~n}a, \{Juan Ignacio\}",

note = "Funding Information: Forte acknowledges financial support from MEC Grant Ref: AP2000-1327 and Banco Sabadell. Pe{\~n}a acknowledges financial support from MEC grants PB98-0030 and BEC2002-00279, and MCI grant ECO2009-12551. Preliminary versions of this paper have been presented with the title “Debt Financing and Default Probabilities” at the IX Foro de Finanzas (Pamplona), and with the title “The Design of Refinancing Contracts” at LACEA 2002. The authors appreciate helpful comments from Carmen Ansotegui and an anonymous referee. The usual disclaimers apply. ",

year = "2011",

month = jan,

doi = "10.1016/j.srfe.2010.10.001",

language = "English",

volume = "9",

pages = "1--10",

journal = "Spanish Review of Financial Economics",

issn = "2173-1268",

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AU - Forte Arcos, S.

AU - Peña, Juan Ignacio

N1 - Funding Information: Forte acknowledges financial support from MEC Grant Ref: AP2000-1327 and Banco Sabadell. Peña acknowledges financial support from MEC grants PB98-0030 and BEC2002-00279, and MCI grant ECO2009-12551. Preliminary versions of this paper have been presented with the title “Debt Financing and Default Probabilities” at the IX Foro de Finanzas (Pamplona), and with the title “The Design of Refinancing Contracts” at LACEA 2002. The authors appreciate helpful comments from Carmen Ansotegui and an anonymous referee. The usual disclaimers apply.

PY - 2011/1

Y1 - 2011/1

N2 - Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results. A lower firm value growth generates downgrades and a higher firm value growth generates upgrades, as expected. However, downgrades tend to be higher in absolute terms. We also find that the inverse relation between credit spreads and risk free rate that structural models usually predict still holds in this setting, but only in the short run. This negative relation will turn to be null in the medium run and positive in the long run.

AB - Many firms choose to refinance their debt. We investigate the long run effects of this extended practice on credit ratings and credit spreads. We find that debt refinancing generates systematic rating downgrades unless a minimum firm value growth is observed. Deviations from this growth path imply asymmetric results. A lower firm value growth generates downgrades and a higher firm value growth generates upgrades, as expected. However, downgrades tend to be higher in absolute terms. We also find that the inverse relation between credit spreads and risk free rate that structural models usually predict still holds in this setting, but only in the short run. This negative relation will turn to be null in the medium run and positive in the long run.

KW - Credit rating

KW - Credit spreads

KW - Refinancing contract

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DO - 10.1016/j.srfe.2010.10.001

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VL - 9

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JO - Spanish Review of Financial Economics

JF - Spanish Review of Financial Economics

IS - 1

ER -

Debt refinancing and credit risk

Abstract

Keywords

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