Washington Law Review

Article

Hostile Restructurings

December 01, 2021 | 96 Wash. L. Rev. 1333

Abstract: The conventional wisdom holds that out-of-court loan restructurings are mostly consensual and collaborative. But this is no longer accurate. Highly aggressive, nonconsensual restructuring transactions—what I call “hostile restructurings”—are becoming a common feature of the capital markets. Relying on hypertechnical interpretations of loan agreements, one increasingly popular hostile restructuring method involves issuing new debt that enjoys higher priority than the existing debt; another involves transferring the most valuable collateral away from existing lenders to secure new borrowing.

These transactions are distinguishable from normal out-of-court restructurings by their use of coercive tactics to overcome not only the traditional minority lender holdout problem, but also the collective bargaining power of the entire lender group. In other words, in hostile restructurings, the goal of the negotiations is not simply to cram the restructuring down the throats of a self-interested or misguided minority holdout; instead, the goal is to cram the plan down on the entire lender group by pitting similarly situated lenders against one another.

Hostile restructurings not only strain normal interlender dynamics—they also challenge traditional understandings of what it means to be a senior secured creditor. The ensuing lender arms race has, in turn, carved new fault lines in chapter 11 bankruptcy proceedings. Using detailed case studies, this Article is the first to explore both how these hostile restructurings differ from the traditional interlender conflict dynamics and how they amplify the distributional concerns that have traditionally plagued bankruptcy restructurings.

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