Friday, December 14, 2007

Incentive conflict in bankruptcies

From the Economist:

Changes to bankruptcy laws in both America and Europe in recent years ought to have made it easier to revitalise or kill off ailing companies. But companies' finances have become much harder to unravel. Offered cheap money on easy terms, companies—just like consumers and homeowners—have borrowed far more than they used to. The type and complexity of debt have grown too, as have the range and number of creditors.

All this has increased the potential for conflict when a company becomes insolvent. A high level of debt, relative to a company's assets, means that a good proportion of creditors will be left with nothing. Because any restructuring plan has to be approved by a majority of creditors, the ability of a group of lenders to hold out for a better deal has grown. Some institutions will have taken bets that a company will go bust, and so stand to make money if a restructuring fails. This sets the stage for long, fierce battles between different classes of creditor.

No comments:

Post a Comment