Norbert Hirschauer, Bernhard Forstner, Martin Odening
Published: 01.02.2000 〉 Heft 2/2000 〉 Resort: Articles
Submitted: N. A. 〉 Feedback to authors after first review: N. A. 〉 Accepted: N. A.
The Effects of the Debtor Warrant Bond Regulation upon the Capital Costs of Old DebtsMany East German farms still have liabilities - or "Old Debts" as they are called - going back to GDR-times. In order to prevent bankruptcies on a huge scale, in the early nineties the German Government offered a partial remission of "Old Debts" as well as a "Relief of the Balance Sheet" for the remaining liabilities. According to that, "Old Debts" were no longer stated as liabilities, but as company capital. The precondition for such a "Relief of the Balance Sheet" was a subordination agreement of the Old-Debt-creditors. In return, the farms had to agree to use 20 % of their annual profit to pay off their "Old Debts". The "Relief of the Balance Sheet" was afforded to the companies for an indefinite period of time. Therefore, one may ask which actions - from an entrepreneurial point of view - the management of these farms would take in order to influence the taxable profit and therefore future repayments. Hence we calculate the capital costs of "Old Debts" under the given repayment conditions including fiscal considerations using financial models. It turns out that the repayment conditions for "Old Debts" include substantial subsidies, and that - for a wide range of model parameters like interest rate, profit, repayment period etc. - a profit seeking management will probably defer repayments as long as possible.