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One of the biggest surprises of the recent pandemic from a bankruptcy perspective has been the ready availability of financing. A variety of factors—such as an estimated $2.5 trillion in available funding at the outset of the crisis and the buoyant stock market—may have contributed. In this Essay, I focus on a less widely appreciated factor, a striking shift in the capital structure of many corporate debtors. Rather than borrowing from one group of lenders, debtors now often borrow from multiple groups of diverse lenders. Although the new capital structure complexity has downsides, it also could counteract a longstanding problem in the bankruptcy financing market: the monopoly enjoyed by the debtor’s inside lenders due to asymmetric information and debt overhang issues that discourage outside lenders from offering to provide financing. Other inside lenders, who do not face the same information asymmetries as outside lenders, may increasingly challenge a debtor’s favored inside lenders.

Unfortunately, several features of current bankruptcy practice could prevent this optimistic scenario from emerging, including courts’ reluctance to grant so-called priming liens, and provisions in intercreditor and restructuring support agreements that thwart alternative lending offers. Yet even if courts continue on their current track, the number of competing DIP financing offers seems likely to increase. And each of the impediments to a much more competitive bankruptcy financing market could easily be remedied either by courts or by legislative reform.


Bankruptcy, reorganization, Chapter 11, debtor-in-possession financing, DIP, COVID-19 pandemic, economic shutdown, restructuring support agreements, RSAs, fragmented capital structure, first, second & priming liens, Neiman Marcus

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Yale Law Journal Forum

Publication Citation

131 Yale L. J. F. 315 (2021)