Multiple Lenders and Corporate Distress: Evidence on Debt Restructuring

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Abstract:Multiple banking is a common characteristic of the corporate lending, particularly of midsized and large firms. However, if the firms are facing distress, multiple lenders may have serious coordination problems, as has been argued in the theoretical literature. In this paper we analyze the problems of multiple banking in borrower distress empirically. We rely on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on bank pools, a legal institution aimed at coordinating lender interests in distress. We find that the existence of small pools increases the probability of workout success and that bargaining costs are positively related to pool size. We identify major determinants of pool formation, in particular the number of banks, the distribution of lending among banks, and the severity of the distress.JEL Classification: D74, G21, G33, G34

How Do Market Prices and Cheap Talk Affect Coordination?

“…The experimental results of this paper are consistent with the findings from recent empirical studies. Brunner and Krahnen [] document that moderate‐sized “bank pools” have a positive impact on the success of a distressed loan workout in Germany. Bank pools are cheap talk in that they are formed to allow multiple creditors to communicate with each other through nonbinding guarantees.…”

Bank Relationships and Private Firms’ Financial Reporting Quality

“…3 Empirical studies in the USA, Germany and Italy indicate that relationship lending increases credit availability for private firms (Berger & Udell, 1995;Bharat, Dahiya, & Saunders, 2011;Bolton et al, 2013;Harhoff & Körting, 1998). Relationship lenders are also more likely than other lenders to provide liquidity support in the event of financial distress (Brunner & Krahnen, 2008;Couwenberg & de Jong, 2006;Puri et al, 2013).…”

“…The relationship lending literature argues that a close relationship enables the bank to acquire private information about the firm's credit risk over time and to influence the firm's management, reducing information asymmetries and agency problems (Berger & Udell, 1995;Boot, 2000;Elsas, 2005;Rajan, 1992). Consequently, there is evidence that private firms with strong bank relationships are less credit-constrained (Berger & Udell, 1998;Bolton, Freixas, Gambacorta, & Mistrulli, 2013;Petersen & Rajan, 1994) and that relationship lenders are more likely than other lenders to provide liquidity support in the event of financial distress (Brunner & Krahnen, 2008;Couwenberg & de Jong, 2006;Puri, Rocholl, & Steffen, 2013).…”

Banking relationship numbers and new business bankruptcies

“…Multiple bank relationships make it difficult for creditors to coordinate with each other, particularly in the case of business restructuring, and thus increase the risk for customer firms (Dewatripont and Maskin 1995;Bolton and Scharfstein 1996;Foglia et al 1998;Brunner and Krahnen 2008). In contrast, some studies have shown that multiple bank relationships reduce the theoretical firm bankruptcy risk.…”