Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring

Review of Economic Studies (Impact Factor: 2.81). 04/2008; 75(2):415-442. DOI: 10.2139/ssrn.302351
Source: RePEc


Multiple banking is a common characteristic of the corporate lending, particularly of medium-sized and large firms. However,
if the firms are facing distress, multiple lenders may have serious coordination problems, as has been argued in the theoretical
literature. In this paper we analyse the problems of multiple banking in borrower distress empirically. We rely on a unique
panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular,
it includes information on “bank pools”, a legal institution aimed at coordinating lender interests in distress. We find that
the existence of small pools increases the probability of workout success and that this effect reverses when pools become
large. We identify major determinants of pool formation, in particular the number of banks, the distribution of lending among
banks, and the severity of the distress.

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    • "To document this force empirically, Asquith, Gertner, and Scharfstein (1994) show that distressed …rms with more dispersed creditors …nd it harder to restructure out of court. Brunner and Karhnen (2008) show that German banks of distressed …rms form pools prior to bankruptcy to mitigate coordination problems. …nancial system. "
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    ABSTRACT: This paper provides evidence that lenders to a firm close to distress have incentives to coordinate: lower financing by one lender reduces firm creditworthiness and causes other lenders to reduce financing. To isolate the coordination channel from lenders’ joint reaction to new information, we exploit a natural experiment that forced lenders to share negative private assessments about their borrowers. We show that lenders, while learning nothing new about the firm, reduce credit in anticipation of other lenders’ reaction to the negative news about the firm. The results show that public information exacerbates lender coordination and increases the incidence of firm financial distress.
    Full-text · Article · Mar 2011 · The Journal of Finance
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    • "Moreover, this study suggests that information contained in analyst forecast dispersion and accruals can play a decisive role in bankruptcy outcomes for firms with public debt, which are subject to more severe creditor coordination problems. Creditors are shown to be less likely to coordinate when (1) information on future fundamentals of the firm is more uncertain (Morris and Shin, 2004), or (2) managements' projection of future cash flows is more negative (Brunner and Krahnen, 2008). By providing empirical evidence that information on future fundamentals of the firm can affect creditor coordination in the out-of-court restructuring, I extend findings in the prior literature on creditor coordination. "
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    ABSTRACT: I use a hand-collected sample of 2,518 bankruptcy filings over the period 1980-2009 to investigate the role of analyst forecast dispersion and accruals in predicting bankruptcy. I find evidence that both are incremental predictors of bankruptcy. I also find evidence that information contained in analyst forecast dispersion and accruals regarding future fundamentals of the firm, because it can affect creditors' decisions to coordinate in out-of-court restructurings, can incrementally help to predict bankruptcy outcomes. Incorporating analyst forecast dispersion, accruals, creditor coordination, and control variables into existing bankruptcy prediction models, I find consistently across the forecast period a 10% average increase in out-of-sample forecasting accuracy. This study provides novel evidence on the incremental information on firms' bankruptcy risk contained in analyst forecast dispersion and accruals, and suggests that bankruptcy prediction can be made more accurate by incorporating these variables, together with creditor coordination and other control variables, into bankruptcy prediction models.
    Preview · Article · Feb 2011
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    • "Additionally, when the firm's debt is held by a multitude of creditors, successful debt workouts may become more problematic due to both holdout problems and conflicts of interest (Gertner and Scharfstein (1991)). In this respect, a strand of the existing literature (Gilson, John and Lang (1990), Brunner and Krahnen (2008)) argues that a large proportion of bank debt is beneficial in avoiding bankruptcy, given that: (i) banks are better informed than other creditors; (ii) different banks lending to the same firm normally share similar interests and coordinate their response in case of financial distress. "
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    ABSTRACT: This paper investigates whether the availability of credit insurance via credit default swaps (CDS) has inuenced the debt restructuring process in a sample of U.S. reference entities. Contrary to the predictions of the empty creditors theory, we do not find evidence that the presence of CDS favors bankruptcy over a private workout. The main determinants of the probability of filing for bankruptcy in the 2008-2009 crisis are leverage and short-term debt ratios, the proportion of secured debt, and a simplified debt structure concentrated on bank debt. A significant increase in private workouts follows the introduction of the 2009 Recovery Act.
    Preview · Article · Dec 2010 · SSRN Electronic Journal
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