Creditors are generally familiar with various forms of subordination, such as contractual, structural, statutory, and equitable subordination. Yet, they may be less familiar with a dynamic that has become increasingly prominent in recent high-profile distress/restructuring situations in which government policy objectives can alter creditor priorities and potential recoveries without any formal change in legal priority.

In a new article, I discuss this “policy in command” dynamic in which governments prioritize certain overriding policy goals in response to what they view as serious political, economic, social, or national security concerns. In doing so, governments may influence the practical allocation of value among stakeholders in ways that materially affect creditor recovery prospects, even though the formal legal priority of claims remains unchanged.

This dynamic has recently emerged in two different contexts: the United States and China. Despite the countries’ vastly different political systems and economic models and their intense geopolitical rivalry, the U.S. and Chinese governments have recently advanced broader policy objectives while constraining or potentially constraining creditor recoveries. In neither case did the  governments formally alter creditor priorities, yet in both cases government policy objectives could potentially influence the practical allocation of  value and financial resources  in a restructuring scenario.

In the U.S., the policy in command dynamic emerged following the capture of Venezuelan President Nicolás Maduro in early January 2026. Shortly thereafter, the Trump administration issued an executive order placing Venezuelan oil revenues into custodial accounts controlled by the U.S. Treasury Department. The order not only protected Venezuela’s oil revenues from attachment and other enforcement actions, but it also gave the U.S. government broad discretion regarding the allocation and use of those revenues.

Because oil revenues have historically constituted the principal source of foreign exchange and government revenues for Venezuela, how those oil revenues are ultimately deployed could have significant implications for creditor recoveries in any future Venezuelan debt restructuring.  The executive order does not specifically set forth how the U.S. government will make decisions regarding the allocation of the oil revenues and to what precise purposes the oil revenues will be directed beyond broad foreign policy, national security, and other government objectives.

Nonetheless, to the extent that oil revenues are directed toward broader U.S. foreign policy, national security, and other government objectives (e.g., humanitarian assistance, economic or political stabilization, etc.) rather than debt service, creditors may find that their recovery prospects are influenced by policy considerations that lie outside traditional restructuring frameworks and creditor recovery analyses.

At the same time, measures that protect revenues from creditor attachment may serve legitimate objectives, such as preventing a scramble for assets and preserving resources needed for economic stabilization and reconstruction. The key point, though, is that government policy objectives may become an important factor in determining how value is allocated in practice.

A similar dynamic arose in China during the recent crisis involving the country’s largest property’s developers. The collapse of major developers such as Evergrande, Country Garden, and dozens of other firms left millions of Chinese homebuyers with unfinished apartments despite their having paid substantial deposits and being obligated to continue making payments on mortgages.

As public frustration mounted, evidenced by homebuyer protests across China and by the threat of mortgage boycotts, Chinese authorities viewed the situation not merely as a financial problem. Rather, they viewed it as a challenge to social stability in China, which has long been an overarching policy priority of Chinese authorities.In response, Chinese policymakers, at both the national and local levels, adopted a series of measures designed to ensure the completion and delivery of housing projects under a “guaranteed delivery of homes” policy.  Local authorities tightened supervision over escrow accounts holding homebuyer deposits, directed liquidity toward project completion, and supported bank lending programs intended to facilitate the delivery of homes.

These policies reflected an overriding governmental objective: protecting homebuyers and maintaining social stability. Yet they also had implications for creditors because financial resources that otherwise might have been available for debt service were increasingly directed toward housing completion and related policy goals.

The Chinese case is particularly noteworthy because many offshore bondholders of Chinese property developers were already structurally subordinated to onshore creditors that had more direct access to the assets and cash flows of operating companies in mainland China. The Chinese government’s policy response to the property developer crisis did not create that structural disadvantage. Nevertheless, by directing liquidity and financial resources toward project completion and social stability objectives, government policy may have further constrained recovery prospects for offshore creditors.

These examples of the policy in command dynamic in the U.S. and China suggest that, if this dynamic can manifest itself in such different systems, it could potentially arise in many other national contexts.  They also underscore that traditional credit analysis conducted before loans are made may not always capture the full range of risks that may affect recoveries if a loan subsequently experiences financial distress.

Creditors typically focus their credit analysis on matters such as contractual rights, priority provisions, capital structure, collateral packages, the borrower’s financial condition and business prospects, and political risk. Increasingly, however, creditors may also need to consider the possibility that governments confronting economic distress, social unrest, geopolitical tensions, or actual or perceived national emergencies will intervene in ways that influence the practical allocation of value without formally changing legal priorities.

In such circumstances, the most important determinant of creditor recoveries may not be the legal waterfall set forth in the relevant financing and related documents such as loan agreements, bond indentures, or intercreditor agreements.  Instead, the decisive factor may be the policy priorities that governments choose to pursue when faced with challenges to domestic stability or to their broader foreign policy, national security, or geopolitical objectives.

Steven T. Kargman is the founder and president of Kargman Associates/International Restructuring Advisors. This post is based on his recent article, “’Policy in Command’: Government Objectives and Creditor Recoveries in the US and China,” published in International Insolvency & Restructuring Report 2026/27 (IIRR) and available here. The article is reprinted with the kind permission of the publisher of IIRR, Capital Markets Intelligence.