Rent Extraction by Super-Priority Lenders

55 Pages Posted: 16 May 2019 Last revised: 21 Jul 2019

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; China Academy of Financial Research (CAFR)

Wei Wang

Queen's University - Smith School of Business

Date Written: July 19, 2019

Abstract

We present strong evidence of supra-competitive pricing of debtor-in-possession (DIP) loans to firms filing for Chapter 11 bankruptcy. Fully collateralized and with super-priority and strong covenants, we show that DIP loans have near-zero default risk. Nonetheless, their spreads and fees exceed those of even junk-rated loans, adding billions to the borrowing costs of Chapter 11 firms. There is also no evidence that the increasing involvement of hedge funds and private equity funds in providing DIP financing has mitigated rent extraction by lenders in this market. Junior claimants often contest DIP-loan terms in court - but apparently to little avail.

Keywords: Debtor-in-possession, Chapter 11, rent extraction, covenants, loan spreads, fees, roll-up, leveraged loans, prepetition lenders

JEL Classification: G14, G34

Suggested Citation

Eckbo, B. Espen and Li, Kai and Wang, Wei, Rent Extraction by Super-Priority Lenders (July 19, 2019). Tuck School of Business Working Paper No. 3384389 (2019). Available at SSRN: https://ssrn.com/abstract=3384389 or http://dx.doi.org/10.2139/ssrn.3384389

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

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

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Kai Li

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://finance.sauder.ubc.ca/~kaili

China Academy of Financial Research (CAFR)

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

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

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