Within an optimal contracting framework, we analyze some important aspects of debt structure: the number of creditors a company borrows from; the allocation of security interests among creditors; and inter-creditor covenants that govern renegotiation of debt contracts. The key to our analysis is the idea that debt structure affects the outcome of debt renegotiation following a default. Debt structures that lead to inefficient renegotiations are beneficial in that they deter default, but they are also costly if default is beyond a manager's control. The optimal debt structure balances these effects. We characterize how the optimal debt structure depends on firm characteristics such as its technology, credit rating, the market for its assets.
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