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In Rememberance: World Trade Center (WTC)

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Multiple Lenders and Corporate Distress: Evidence on debt restructuring

by Antje Brunner of Humboldt-Universitaet Berlin & CFS, and
Jan Pieter Krahnen Frankfurt University & CEPR

June 2006

Abstract: Multiple banking is a common characteristic of the corporate lending, particularly of midsized and large firms. However, if the firms are facing distress, multiple lenders may have serious coordination problems, as has been argued in the theoretical literature. In this paper we analyze the problems of multiple banking in borrower distress empirically. We rely on a unique panel data set that includes detailed credit-file information on distressed lending relationships in Germany. In particular, it includes information on bank pools, a legal institution aimed at coordinating lender interests in distress. We find that the existence of small pools increases the probability of workout success and that bargaining costs are positively related to pool size. We identify major determinants of pool formation, in particular the number of banks, the distribution of lending among banks, and the severity of the distress.

JEL Classification: D74, G21, G33, G34.

Keywords: Bank Lending, Bank Pool, Distress, Reorganization, Coordination Risk, Bankruptcy.

Published in: Review of Economic Studies, Vol. 75, No. 2, (April 2008), pp. 415-442.

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