Preferential Credit Treatment, Bond Valuations, and Distressed Exchanges

This paper uses Duffie and Singleton (1999) discount model for defaultable bonds to infer the presence of a preferential credit treatment (PCT) for Multilateral Development Banks (MDBs) in loss given default (LGD) space. The main inferences from the paper are twofold. -1- Lower lending fees in MDBs loans relative to private lenders generate a significant PCT. That is, a refinancing of a loan would be less severe for loans that already encompass a subsidized coupon. -2- Non-concessional loans have lower LGDs than concessional loans. This is consistent with the premise that non-concessional lending help financing concessional loans. Overall, our conceptualization of the problem supports an explanation for the preferential treatment of MDBs, even under the assumption of no seniority for MDBs loans relative to private loans.