
How the Balance of Power Is Changing in the Resolution of Corporate Financial Distress
Among those who study corporate financial distress and reorganization, the notion that senior lenders are in control is deeply ingrained. Celebrated papers in the law and corporate finance literatures attribute lender influence during periods of distress to blue-sky contracting practices.[1] When extending credit, senior lenders take a blanket lien on the borrower’s assets, and the borrower agrees to strict financial maintenance and other covenants. The covenants are designed to hem in the borrower. If its performance declines or it wants to pursue new opportunities that materially alter risk, the borrower has to renegotiate. Lenders use renegotiations to force changes … Read more