QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: daveangelQuoteOriginally posted by: dweebQuoteOriginally posted by: daveangelyou could use a form the KMV model for structural credit risk modelling. i.e. look at the defaulted debt as a call option on the assets of the firm. but again you will have to look at the asset valueI'll throw this out there - the value of a firm's assets is largely ignored in finance. Accounting records physical assets at historic value plus depreciation on the balance sheet. Intangibles are mostly ignored. In corp finance it's the PV of future cash flows, whatever they may be. So if the firm in default is in for example tech, IP development, biotech, or has obsolete assets, what are the asset values in default??low or zero.. I see no ambiguity. future cash flows don't come from thin air. they come from assets.But sometimes those assets are so intangible that they aren't even listed as intangibles on the company's balance sheet. To the extent that a company's brand, business processes, and relationships with suppliers, employees, and customers enable the company to produce a future cash flows, who needs assets?Yes, I see your point. Anyway I shall consider that there are kind of two different scenarios: in business and out-of-business; let's say. In the first case everything is going well, coupon payments are actually paid and the like. In the second scenario you are either restructuring or liquidating.I would say that "hard assets" that you can sell in order to pay your debts should be considered in both cases, but probably while in business they likely should add to the credit trustworthyness of the firm (enhancing their credit rating...), in the second case they are the only things to generate those future cashflows deemed to re-pay old debts.Personally I like what was pointed out before (at some point):QuoteExcellent point! Most of the valuation of a firm's equity and probability of default comes from the income statement. But the recovery value is a strong function of the balance sheet.Properly pricing defaulted debt also depends on the type of default. In the US, at least, the difference between Chapter 11 bankruptcy (restructuring) and Chapter 7 bankruptcy (liquidation) would lead to two very different pricing models because the first may involve debt-to-equity conversion and income statement issues around future cash flows to partially repay old debt while the second type involves liquidation of assets.I shall dig further in the type of models one can put together in these two cases. More than a CDS in default, I would consider the defaulting mechanics more similar to a CDO's tranche but at random (first exit?) times.