A Comparison of Financial Recontracting in Workouts and Chapter 11 Reorganizations

Julian R Franks and Walter N Torous

CEPR Financial Markets Paper from European Science Foundation Network in Financial Markets, c/o C.E.P.R, 33 Great Sutton Street, London EC1V 0DX.

Abstract: This paper investigates the financial recontracting of firms in workouts and Chapter 11 reorganizations. The terms of recontracting include the medium of exchange used to redeem defaulted securities, the writedown of creditors claims, and deviations from absolute priority experienced by different creditor classes as well as equity holders. An examination of the terms of reorganization agreed by creditors shows that deviations in favour of equity holders are small in Chapter 11 reorganizations, averaging 2.3% of the value of the reorganized firms, compared with 9.5% in informal reorganizations. The willingness of creditors to offer more to equity holders suggests that the formal reorganization process is substantially more costly.

Keywords: Corporate Finance; Recontracting; Chapter 11 Reorganizations (search for similar items in EconPapers)
Date: 1993-03
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