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Creditor-on-Creditor Violence and Secured Debt Dynamics

By: Samuel Antill, Neng Wang and Zhaoli Jiang
  • Format:Print
  • | Language:English
  • | Pages:91
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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

Insolvency and Bankruptcy; Debt Securities; Conflict and Resolution

Citation

Antill, Samuel, Neng Wang, and Zhaoli Jiang. "Creditor-on-Creditor Violence and Secured Debt Dynamics." NBER Working Paper Series, No. 32823, August 2024. (Reject & Resubmit, Review of Financial Studies.)

About The Author

Samuel B. Antill

Finance
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