The Celsa Case - A Take-Over Lender-Led Non-Consensual Restructuring Plan

This is a dynamic time for insolvency law. Many jurisdictions have made or are considering reforms to their insolvency regimes. The United Kingdom has proposed a new standalone restructuring mechanism that incorporates many attributes of Chapter 11, including a cross‐class cram down and the absolute priority rule. A distinctive feature of the UK proposal is the infusion of judicial discretion permitting courts to deviate from the absolute priority rule. This discretion is not permitted in the United States. This judicial discretion addresses a key problem with the application of the absolute priority rule in the United States—it may serve as an impediment to reorganization. This impediment is exacerbated by the recent U.S. Supreme Court decision, Czyzewski v. Jevic Holding Corp., which impacts the effective use of Chapter 11 rescue tools. This article explores the absolute priority rule, the problems associated with it, and the effect of Jevic in the United States. Drawing on the UK reform proposal, I argue that the United States should implement reforms that infuse judicial discretion into the application of the absolute priority rule. Doing so will facilitate the underlying policy goal of rescuing the company in Chapter 11 and also promote a broader policy goal of rescuing the business.

The paper analyses the correlation between the various categories of strategic behaviours that may be adopted by the parties involved in a debt restructuring and the three types of priority rules that might apply: the so called “absolute priority rule” and “relative priority rule” and a rule that can be named “no priority rule”. More specifically, the article offers an overview of the literature concerning the opportunistic behaviours in a debt restructuring and reports a lack of categorisation and agreement on the meaning of the terms used to label such behaviours, revealing how this negatively affects the discussion on priority rules. Therefore, the paper aims at filling such gap, by presenting a systematic analysis of four categories of strategic behaviour: “holdout”, “holdup”, “free-riding” and “rent-seeking”. On the basis of such categorisation, the paper proceeds with an analysis of the ways in which each category of opportunistic behaviour is affected by the application of each of the “absolute priority rule”, the “relative priority rule” and the “no priority rule”.

ABSTRACTClaims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 Bankruptcy Reform Act. We measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents, on average, 7.6% of the total awarded to all claimants. Evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority, suggesting that deviations from the rule were expected by the equity markets.

This paper considers general (single facility) queueing systems with exponential service times, dealing with a finite number J of distinct customer classes. Performance of the system, as measured by the vector of steady state expected sojourn times of the customer classes (the performance vector) may be controlled by adopting an appropriate preemptive priority discipline. We show that the performance space, the set of performance vectors which are achievable under some preemptive work conserving rule, is a polyhedron described by 2J − 1 (in)equalities. The special structure of this polyhedron nevertheless allows for efficient procedures to minimize any separable convex function of the performance vector. Linear objectives are shown to be minimized by absolute priority rules, thus generalizing a well known result for M/M/1 systems. We also show that each point in the performance space may be achieved by a specific randomization of at most J + 1 absolute priority rules.

ABSTRACTThis study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded (i.e., usually junior claimants) bondholders. The data indicate that, on average, bondholders benefit, albeit slightly, from absolute priority rule (APR) violations. This paper also examines the degree to which the bond market, in the bankruptcy filing month, anticipates departures from the APR and other influences on the payoff to bondholders. In other words, we investigate the informational efficiency of the market for bankrupt bonds. Overall, despite the complex and lengthy nature of bankruptcy proceedings, the results support efficiency.

Bond prices in a debt priority structure with absolute priority rule deviation

That a firm's initial equityholders often emerge from Chapter 11 bankruptcy proceedings with more value than the absolute priority rule would suggest is now a generally accepted fact. The form in which this value is distributed, however, is less well understood. In particular, why do the original shareholders of some firms emerge from Chapter 11 bankruptcy with stock in the reorganized firm, while others receive warrants? This essay proposes that informational asymmetries provide the answer to this question. By proposing a reorganization plan in which they receive warrants, the original stockholders of a firm with good future prospects can signal their superior information to the creditors in a way that firms with poor prospects will not wish to mimic.

Asset Substitution, Debt Pricing, Optimal Leverage and Maturity

The Paradox of Pledgeability

A sovereign’s inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate this problem is the inclusion of a seniority clause in debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the “absolute priority” or “first-in-time” rule). In this paper, we propose a modification of the absolute priority rule suited to sovereign debts contracts and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default. (JEL E32, E44, F34, G15, H63, O16, O19)

Asymmetric Information, Choice of Workout under Financial Distress, and Absolute Priority Violations

Sovereigns in Distress:Do They Need Bankruptcy? Michelle J. White Should there be a sovereign bankruptcy procedure for countries in financial distress? This paper explores the use of U.S. bankruptcy law as a model for a sovereign bankruptcy procedure and asks whether adoption of such a procedure would lead to a more orderly process of sovereign debt restructuring. It assumes that a quick and orderly debt restructuring process is more efficient than a prolonged and disorderly one, because a lengthy process of debt restructuring takes a high toll on debtor countries' economies as well as harming creditors in general. I concentrate on three goals for a sovereign bankruptcy procedure: preventing individual creditors or groups of creditors from suing the debtor for repayment, preventing groups of creditors from strategically delaying negotiations or acting as holdouts, and increasing the likelihood that private creditors will provide new loans to sovereign debtors in financial distress, thus reducing the pressure on the International Monetary Fund (IMF) to fund bailouts. I conclude that nonbankruptcy alternatives are less likely to accomplish these goals than a sovereign bankruptcy procedure. U.S. Bankruptcy Law and Important Trade-Offs in Bankruptcy Three sections of the U.S. Bankruptcy Code are of possible relevance for a future international bankruptcy procedure: Chapter 7 (bankruptcy [End Page 287] liquidation), Chapter 11 (corporate reorganization), and Chapter 9 (municipal bankruptcy). Chapter 7 Chapter 7 is the U.S. bankruptcy liquidation procedure for both corporations and individuals. When a corporation files under Chapter 7, its operations are shut down and the corporation ceases to exist. Its assets are liquidated and the proceeds distributed among creditors according to the absolute priority rule (APR, described below). When an individual files under Chapter 7, his or her assets are divided into exempt and nonexempt categories. Nonexempt assets are liquidated and the proceeds distributed among creditors according to the APR. The individual's postbankruptcy earnings are completely exempt from the obligation to repay prebankruptcy debt. For both individuals and corporations, any debt not repaid by the liquidation procedure is discharged.1 Under the APR the administrative expenses of bankruptcy are paid first, unsecured creditors second, and anything left goes to equity holders.2 Each class of creditors must be paid in full before lower-ranking classes receive anything. Unsecured creditors' claims may be divided into subclasses if their contracts with the firm contain subordination agreements, but otherwise all of their claims are treated equally. Claims due in the future (such as long-term bonds) are accelerated to the present. Thus bankruptcy liquidation is a collective procedure aimed at resolving all claims against the debtor. An important advantage of a bankruptcy procedure, whether it involves liquidation or reorganization, is that it reduces creditors' incentives to engage in a race to seize the debtor's assets. As in a bank run, when individual creditors perceive that the debtor's assets are insufficient to repay all of its debts, they have an incentive to race to be repaid before the debtor's funds run out. Such a grab race is destructive, because it results in particular assets of the debtor being liquidated in order to satisfy the winners' claims, even though the debtor's assets may be more valuable if [End Page 288] they remain together. For example, a firm may be unable to continue producing goods if a creditor seizes its main computer, even though it still has all of its other equipment. In the sovereign debt context, a debtor country's manufacturing sector may suffer because it cannot import fuel if a creditor attaches the country's external bank account. The point of the bankruptcy procedure is to reduce creditors' incentive to race for payment by resolving all of the firm's debts at once. If creditors know that winning a grab race will cause the firm to file for bankruptcy, they will have little incentive to enter the race at all, because doing so will not increase their reward unless they win early enough to collect without tipping the debtor into bankruptcy.3 The race by creditors to be first to collect from a failing firm is an example of a prisoners' dilemma. To illustrate, suppose a firm has...

The Court's Discretion in Relation to the Part 26A Cram Down

A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event of default, creditors are to be paid off in the order in which they lent (the ?absolute or ?first-in-time rule). In this paper, we propose a modification of the absolute priority rule that is more suited to the sovereign debt context and analyze its positive and normative implications within a quantitatively realistic model of sovereign debt and default.

Bankruptcy Costs and Violations of the Absolute Priority Rule