Many companies in emerging markets use AAA rated firms in the West to guarantee any debt issue that is made by the firm. A good example is the Bakrie family in Indonesia, who used Bumi plc in the UK to guarantee a loan of $473 million. In 2012, the Bakrie family’s operations were not performing well and their firm was in financial distress.

As a result, the share price of the guarantor, Bumi plc, fell 60 per cent on the possibility that the Bakrie family may default on its loan, thus engaging the guarantor, Bumi plc, to repay the full amount. How would you incorporate a guarantor contract in the Modigliani–Miller framework?