Complementarity of Bank and Market Debt in Dynamic Debt Structure

I develop a dynamic model of firm debt structure with renegotiable bank debt and arm's- length market debt. Bank debt is renegotiated periodically through bilateral firm-bank bargaining, excluding market debt investors and exposing them to dilution. Anticipating renegotiation, the firm issues or repurchases market debt to shape its equity holders' outside option and the bargaining surplus, effectively "front-running" the bank lender's rents. This strategic interaction creates complementarity between bank debt and market debt, driven by the firm's incentive to pit creditors against each other. The model predicts that firms repurchase market debt when renegotiation will increase bank debt, while higher bank debt today leads to greater future market debt issuance.