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Rev Fin 2000; 13:985-1015
© 2000 the Society for Financial Studies

Article

Strategic debt restructuring

TH Noe1,z and J Wang2
1 A. B. Freeman School of Business, Tulane University, St. Charles Ave., New Orleans, LA 70118, USA
2 SAS Institute
z Corresponding author
E-mail: tnoe@mailhost.tcs.tulane.edu

Abstract

We analyze a distressed firm indebted to many creditors. The firm's owners have the option of choosing the sequence of restructuring negotiations with the creditors. We show that sequencing flexibility is beneficial to firm owners, and that the optimal sequencing of restructuring negotiations involves exploiting the firm's liabilities to some creditors so as to moderate the demands of others. Moderately distressed firms will extract concessions from all creditors. In this case, owners can gain if they can credibly commit to conditional restructuring agreements that link the concessions of one creditor to concessions by others.


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