Creditor Coalitions in Bankruptcy

Abstract

We provide a first look at the economics of creditor coalitions in U.S. Chapter 11 bankruptcies using novel coalition membership and holdings data.  We find that coalition formation propensities are driven by variables such as debt size, creditor dispersion, creditor type, market liquidity, and creditor familiarity.  Bond prices increase following coalition announcements, suggesting that markets associate coalitions with improved recovery.  Using a landmark 2017 court ruling, we show that weakened creditor protections are associated with increased coalition formation and class recovery, but also more litigious and lengthier bankruptcy proceedings.  Our results shed light on key factors affecting creditor coordination behavior.

Keywords: Distressed debt, ad-hoc creditor groups, Chapter 11, hedge funds, Peabody ruling, creditor-on-creditor violence G33, bond recoveries

JEL Classification: G33, G34, G11, G32, D71, K22