New Financing for Distressed Businesses in the Context of Business Restructuring Law by Sanford U. Mba

Author:Sanford U. Mba
Language: eng
Format: epub, pdf
ISBN: 9783030197490
Publisher: Springer International Publishing

4.6 Security Interest for New Lender: A Technique in Contest

4.6.1 Why Security Interests for New Financer or Why Might Administrative Expense Priority Not Suffice?

So far, the prevailing technique to the provision of new financing has been examined on a jurisdictional basis. In view of the importance of incentives for new lenders, it does appear however that the administrative expense technique will not always do. In other words, there may well be need for providing security interest assurance for prospective lenders in the course of the restructuring of the distressed lender. Three key reasons make the creation of security position something to consider. The first is an intuitive argument. The second flows from the first, when we consider the practical implications of statutorily prescribed administrative expense priority in the event of the failure of the restructuring effort. The third reason is grounded in financial economics and touches on the importance of financing entering the capital structure of the distressed firm based on a heightened priority position, such as is provided by a security position.

On the intuitive argument, it is worth reiterating that the default-incentivizing tool (whether statutorily expressed or implied), is the administrative expense priority. Many jurisdictions agree on this. The problem however is that financing a distressed debtor is intuitively one that involves risk. Ordinarily, one of the most compelling reasons for obtaining security for financing is the severity of the risks associated with such lending.90 Obtaining security before lending becomes even more compelling when a distressed business seeks to restructure through a channel provided for in bankruptcy law.91 Given the circumstances of the debtor, potential lenders will consider lending to the debtor without security or without adequate security, a risky venture, especially where repayment is dependent on the successful restructuring of the distressed business.92 Few lenders may come forward under these conditions.

Another way to explain the importance of secured new financing as a device for incentivizing lending is to consider the implication of a failed restructuring. The design of the formal restructuring frameworks under consideration show just how much administrative expense priority will not do, if the debtor is unable to wade through its distress and successfully restructure. To buttress this assertion, examples will be drawn from the US, UK and Germany. In the US for instance, new financing is only one example of an item granted administrative expense priority.93 In fact, the list of administrative expenses provided for in the statute is not limited, meaning that more and more items may very well find their way into the list.94 When this happens and creditors are to share on a pro rata basis, it simply reduces the value that may accrue to the lender.95 Furthermore, the non-exhaustive list of administrative expenses provided for in the statute does not create hierarchy for claims listed therein, or the class of creditors who enjoy this priority.96 This means that a distressed financer who has this level of priority is assured of full repayment to the extent that the formal restructuring is altogether

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.