Refinancing and coordination among multiple creditors and a debtor firm

This paper investigates the conditions under which a large creditor offers refinancing to a debtor firm and examines how that refinancing affects the decisions of the debtor firm and other creditors. We develop a model of a coordination game in which the actions of multiple creditors and the debtor firm are determined interdependently of each other. We find that refinancing can be beneficial for the large creditor only when the debtor firm faces a substantial, but not hopeless, risk of default. Whether the refinancing succeeds in preventing the default caused by the coordination failure, or gives rise to moral hazards of the debtor firm, depends on how poor the fundamentals of the debtor firm are. Another finding is that the size of the refinancing tends to be larger in cases where prior lending by a large creditor was greater, resulting in more serious debtor moral hazard.