Loans to Chapter 11 Firms: Contract Design and Pricing

73 Pages Posted: 16 May 2019 Last revised: 6 Apr 2022

See all articles by B. Espen Eckbo

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Kai Li

University of British Columbia (UBC) - Sauder School of Business; Asian Bureau of Finance and Economic Research (ABFER); China Academy of Financial Research (CAFR); European Corporate Governance Institute (ECGI); Canadian Sustainable Finance Network (CSFN)

Wei Wang

Queen's University - Smith School of Business

Date Written: April 5, 2022

Abstract

Using a hand-collected data set of 545 debtor-in-possession (DIP) loan facilities from 2002 - 2019, we show that DIP loans are over-collateralized and contain a comprehensive set of restrictive covenants, mandatory prepayments, and restructuring milestones. We further show that despite a near-zero repayment risk, DIP-loan all-in spread drawn averages 658 basis points- - nearly twice that of matched high-risk leveraged loans. Textual analysis of court documents shows lack of outside lender participation in the loan solicitation process but spreads are lower when outside lender interest is high. Junior claimants often contest DIP-loan terms but to little avail.

Keywords: debtor-in-possession financing; Chapter 11; loan spreads; loan fees; default risk; leveraged loans; relationship lending

JEL Classification: G14, G34

Suggested Citation

Eckbo, B. Espen and Li, Kai and Wang, Wei, Loans to Chapter 11 Firms: Contract Design and Pricing (April 5, 2022). European Corporate Governance Institute – Finance Working Paper No. 794/2021, Available at SSRN: https://ssrn.com/abstract=3384389 or http://dx.doi.org/10.2139/ssrn.3384389

B. Espen Eckbo

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://tuck.dartmouth.edu/faculty/faculty-directory/b-espen-eckbo

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Kai Li (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8353 (Phone)
604-822-4695 (Fax)

HOME PAGE: http://https://sites.google.com/view/kaili/home

Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Canadian Sustainable Finance Network (CSFN) ( email )

Queens University
Kingston, ON
Canada

HOME PAGE: http://https://smith.queensu.ca/centres/isf/research/network.php

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
772
Abstract Views
4,330
rank
45,980
PlumX Metrics