You Can Work it Out! Valuation and Recovery of Private Debt with a Renegotiable Default Threshold

Published:  April 2017
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We extend the structural credit risk model of illiquid debt developed by Blanc-Brude and Hasan (2016) to incorporate the step-in option of senior creditors in project financing and model its impact on the valuation and risk profile of senior unsecured project debt.


This article extends the private debt credit risk model of Blanc-Brude and Hasan [2016] (henceforth, the BBH model) to integrate the role of loan covenants and the embedded options they typically create for creditors in non-recourse financing structures, often referred to as “project financing” (PF). Our extension of the BBH model allows us to compute the expected recovery rates for individuals and portfolios of private loans that take into account the value of embedded options, using a structural credit risk framework requiring a parsimonious set of inputs.