I thought this thing I was reading may be useful here in SCHSQ scenario.
Consistent with the idea formulated by Bolton and Scharfstein (1996) that higher concentration of
creditors in the capital structure lowers coordination costs, we find that higher creditor concentration
reduces the time the firm spends in bankruptcy. Not surprisingly, this result holds for firms filing a prepack/
prearranged bankruptcy; when creditor concentration is high, the case length is almost of full year
lower than traditional non pre-pack/prearranged filings. But we also find that the concentration of
creditors has a significant economic impact on the duration of the bankruptcy process independent of the
pre-pack/prearranged outcomes. Noticeably, the effect of the concentration of the voting classes has a
particularly strong impact of the time the firm spends in bankruptcy process. For instance, a one standard
deviation in the concentration of the voting class reduces the time in bankruptcy by roughly one quarter.
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Three of our outcome variables are related to how a firm exits Chapter 11: through a traditional
reorganization, via a 363 sale to a strategic or financial buyer, or through a piecemeal liquidation. We
find that higher creditor concentration lowers the likelihood of a liquidation but only through the
influence of concentration on observing pre-pack/prearranged bankruptcy, which rarely results in a
liquidation. However, the concentration of impaired creditors is an important determinant of whether or
not a firm is sold out of Chapter 11; higher concentration increases the likelihood of observing a sale.13
We also examine the impact of creditor concentration on firm-level estimated recovery rates to
creditors. As mentioned earlier, the estimated recovery rates are calculated based either on forwardlooking
estimates of enterprise value for the exiting firms in the case of reorganizations, or total cash
proceeds collected from a sale in the case of 363 sale or liquidation. We find that higher levels of
concentration are associated with lower recovery rates to creditors. This result is somewhat surprising
given that higher levels of concentration appear to lower ex-post costs of coordination, which should in
turn, lead to higher recovery rates. However, the recovery rates that we observe may also reflect strategic
interactions occurring between creditors at the voting class level.
Gilson, Hotchkiss, and Ruback (2000) postulate that the estimated value used to determine
recovery rates in a reorganization is itself an outcome of bargaining among different creditor classes and
managers running the bankrupt firm. This bargaining over value has strategic consequences because a
higher valuation implies more claimants are “in the money” and can therefore receive a recovery and vote
on the Plan. Likewise, a lower value makes more claimants “out of the money” and keeps claimants
receiving a recovery and voting on the Plan to a smaller number. These strategic considerations are
particularly important when claimants receive their recovery in the form of equity in the exiting firm. In
this case, the fewer the claimants receiving a recovery, the larger is the equity ownership stake for the
remaining claimants in the emerging firm. Because recoveries are based on the priority structure of the
debt, senior claimants stand to gain the most from a low valuation while junior claimants gain from higher
valuations. Consistent with this thinking, Gilson, Hotchkiss, and Ruback (2000) find that bankruptcy
restructurings in which senior creditors have more bargaining power tend to have lower estimated
recoveries, while restructurings in which junior claimants have stronger power have higher recoveries.
Thus, the finding that higher concentrated capital structures are associated with lower recovery rates
could reflect the outcome of bargaining in which concentrated senior creditors bias down the negotiated
valuation lower.
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