Creditor-on-Creditor Violence and Secured Debt Dynamics

90 Pages Posted: 9 May 2024

See all articles by Samuel Antill

Samuel Antill

Harvard Business School

Neng Wang

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER); Asian Bureau of Finance and Economic Research (ABFER)

Zhaoli Jiang

Hong Kong Polytechnic University

Date Written: May 8, 2024

Abstract

Secured lenders have recently demanded a new condition in distressed debt restructurings: competing secured lenders must lose priority. We model the implications of this "creditor-on-creditor violence" trend. In our dynamic model, secured lenders enjoy higher priority in default. However, secured lenders take value-destroying actions to boost their own recovery: they sell assets inefficiently early. We show that this creates an ex-ante tradeoff between secured and unsecured debt that matches recent empirical evidence. Introducing the recent creditor-conflict trend in this model endogenously increases secured credit spreads. Importantly, it also increases ex-ante total surplus: restructurings endogenously introduce efficient state-contingent debt reduction.

Keywords: Continuous-time capital structure models, Liability management, Secured debt, Bankruptcy, Creditor-on-creditor violence, Dropdowns, Uptiers

JEL Classification: G32, G33, K22

Suggested Citation

Antill, Samuel and Wang, Neng and Jiang, Zhaoli, Creditor-on-Creditor Violence and Secured Debt Dynamics (May 8, 2024). Available at SSRN: https://ssrn.com/abstract=4821620 or http://dx.doi.org/10.2139/ssrn.4821620

Samuel Antill (Contact Author)

Harvard Business School ( email )

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Neng Wang

Columbia University - Columbia Business School, Finance ( email )

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New York, NY 10027
United States

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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Asian Bureau of Finance and Economic Research (ABFER) ( email )

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Singapore

Zhaoli Jiang

Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon
Hong Kong

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