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    Business Scholarship Podcast

    Sneha Pandya on Creditor Violence

    Thu Jul 06 2023
    Corporate Debt FinanceCreditor-on-Creditor ViolenceDollar LoansLeveraged BuyoutsDebt TextualismDebt Market Reforms

    Description

    Corporate debt finance, creditor-on-creditor violence, tribalism in dollar loans, uncertainties in leveraged buyouts, unintended consequences of debt textualism, and potential reforms in debt markets are explored in this episode.

    Insights

    Incentives and Tensions

    The world of corporate debt finance involves complex incentives and tensions among various parties seeking to maximize their returns.

    Race to the Bottom

    In distressed situations, there is a race to recover money rather than preserving reputational capital.

    Opportunistic Behavior

    Players in dollar loan contracts can act opportunistically based on the scope of the contract, leading to disputes and challenges.

    Risks to Workers and Consumers

    Leveraged buyouts and excessive debt pose risks to workers, small businesses, and consumer choice.

    Debt Textualism and Loopholes

    Debt textualism, focusing solely on contract text, can lead to loopholes and gaming out strategies by repeat players.

    Reforms for Better Outcomes

    Reforms such as reviving good faith principles and expanding agency authority can address unintended consequences in debt markets.

    Importance of Debt Markets

    Debt markets play a significant role in the financial system and should be considered in discussions about reform.

    Chapters

    1. Introduction to Corporate Debt Finance
    2. Creditor-on-Creditor Violence and Disruption
    3. Tribalism and Opportunistic Behavior in Dollar Loans
    4. Uncertainties and Risks in Leveraged Buyouts
    5. Unintended Consequences and Reforms in Debt Markets
    6. Importance of Debt Markets and Potential Reforms
    Summary
    Transcript

    Introduction to Corporate Debt Finance

    00:06 - 06:55

    • Corporate debt finance is a world often overlooked in favor of equity securities.
    • The main players in corporate debt finance are companies and firms selling debt, investors buying the debt, and intermediaries like investment banks.
    • Incentives in this world can be complicated, with parties seeking to maximize their individual returns.
    • There are also lesser-known players involved, such as workers, customers, bankruptcy lawyers, and transactional lawyers.

    Creditor-on-Creditor Violence and Disruption

    00:06 - 06:55

    • Creditor-on-creditor violence refers to conflicts between creditors in the event of a firm's distress or insolvency.
    • These relationships have always had some tension but may have started as cooperative before becoming more combative.
    • Private equity and distress debt investors can disrupt the harmony among creditors due to the large amounts of money at stake.
    • This environment encourages a race to the bottom where recovering money becomes more important than reputational capital.

    Tribalism and Opportunistic Behavior in Dollar Loans

    06:38 - 13:26

    • In the world of dollar loans, there is room for tribalism and territorialism.
    • The environment encourages a race to the bottom where recovering money matters more than reputational capital when a firm becomes insolvent.
    • Parties can show up on one side in one litigation and be on the other side in another, which could change incentives for mutual cooperation.
    • Players in these contracts can act opportunistically based on the scope of the contract.
    • Complicated credit agreements provide opportunities for interpretation, challenge, and argumentation before a court.
    • Borrowers often engage in opportunistic behavior to push creditors to ally with like creditors and fight unlike creditors.
    • Lawyers and bankers may also act opportunistically by jumping into these disputes for financial gain.
    • Incentives today are fraught due to the precarious relationships among borrowers and lenders.
    • The example of Citibank and Revlon's lenders demonstrates how incentives can lead to disputes over loan payments.

    Uncertainties and Risks in Leveraged Buyouts

    13:03 - 20:13

    • The relationship among creditors and borrowers in leveraged buyouts creates uncertainties and incentivizes opportunistic behavior.
    • The precariousness among the creditor class affects not only creditors but also workers, consumers, and the public at large.
    • Workers and small businesses depend on debt arrangements for capital, which poses risks to their payment stability.
    • Consumer choice is impacted by bankruptcies of big-name retail firms that take on excessive debt.
    • The public has a vested interest in understanding how money is made and managed in the financial market, especially when it comes to pension funds.
    • Debt textualism is an interpretive method used by courts to resolve contractual disputes based on the plain meaning of terms.
    • Debt textualism differs from constitutional or statutory textualism in that it focuses solely on the contract's text without considering shared intent or common purpose.
    • Debt textualism can lead to loopholes and gaming out strategies by repeat players in contract drafting and litigation.

    Unintended Consequences and Reforms in Debt Markets

    19:44 - 27:01

    • Debt textualism has led to unintended consequences and risky outcomes in the legal space.
    • Lawyers have started implementing protections for mistaken payments, but it's not reasonable to expect every party to change their terms every time something goes wrong.
    • Reforms can help address this problem:
    • Let the market fix the problem by responding in contracts and employing express terms that ask courts to fill gaps based on good faith principles.
    • Courts can revive the duty of good faith and fair dealing in credit agreements and use express terms of a contract as a guide for gap-filling.
    • Legislative and regulatory reforms can be implemented, such as expanding agency authority to monitor debt markets via disclosure requirements for investor protection.
    • Use debt textualism for socially beneficial outcomes, like green bonds that are harder to unwind.
    • The paper argues that there is a relationship between how contracts are drafted, interpreted, and how markets function, which can be better explained by debt textualism.
    • Common-sense notions of good faith and fair dealing should be revived in contract interpretation for better outcomes.
    • It's important to consider the relationship between big players and average people whose money is involved in these markets.

    Importance of Debt Markets and Potential Reforms

    26:50 - 28:21

    • Debt markets are often overlooked in discussions about financial reform.
    • The paper highlights the importance of considering the real-world impacts of debt markets.
    • There may be room for reform in the public interest.
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