Buy-Backs, Debt-Equity Swaps, Asset Exchanges, and Market Prices of External Debt
- Peter Wickham, Jacob Frenkel, and Michael Dooley
- Published Date:
- March 1989
- MICHAEL P. DOOLEY*
Buy-backs and asset exchanges that alter the amount and characteristics of sovereign debt are evaluated in a simple framework. It is argued that the terms on which existing debt can be purchased or exchanged depend upon market prices for alternative instruments expected to prevail following the transaction. These expected prices depend upon the the amount of debt, the seniority of different classes of debt, and changes in the debtors’ ability to pay that are expected to prevail following a buy-back or exchange. The costs and benefits of buy-backs and assets exchanges to debtors, creditors, and third party benefactors are also identified.