Creditor-on-Creditor Violence and Secured Debt Dynamics

Samuel Antill, Neng Wang and Zhaoli Jiang

No 32823, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G31 G32 G33 G34 (search for similar items in EconPapers)
Date: 2024-08
New Economics Papers: this item is included in nep-cfn
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