
Controlling Tunneling Through Lending Arrangements
In a recent article, I examine how common provisions in lending arrangements (drawing from the LMA and LSTA modal agreements) handle the problem of value diversion in debtor companies. “Tunneling,” which is the expropriation of company value by corporate insiders (Johnson et al. 2000), has been largely considered a problem mainly for (minority) shareholders, as residual claimants. With fixed claims, creditors are typically not concerned with value diversion unless the debtor approaches insolvency. Yet my analysis shows that lending arrangements – including security interests, undertakings, (non-)financial covenants and other restrictions – can nonetheless be effective in monitoring, … Read more