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Bankruptcy codes, bargaining, and the valuation of distressed securities

Marc-Olivier Lücke, The Boston Consulting Group, Germany.
Markus Rudolf, WHU - Otto Beisheim School of Management, Department of Finance, Germany.

Abstract. Do differences in creditor rights across countries affect creditors' recovery rates in distressed exchanges? Theories of strategic debt service imply opposing effects, with borrowers in creditor friendly jurisdictions restructuring at lower firm values but with lower deviations from the absolute priority rule.
Using a comprehensive sample of publicly listed companies from the United States (a relatively equity friendly jurisdiction) and the United Kingdom (a relatively creditor friendly jurisdiction) that have defaulted and restructured their debt between 1998 and 2007, the authors find a significant influence of creditor rights on both the timing of financial restructuring and deviations from absolute priority. Surprisingly, the effect of a delayed restructuring is more important than the reduction in deviations from absolute priority rule, resulting in overall lower creditor recovery rates for distressed exchanges in the United Kingdom compared to the United States.