By Professor Vince Buccola (University of Chicago Law School), Adi Marcovich Gross (Columbia Law School and The Wharton School), and Professor Matthew McBrady (University of Virginia Darden School of Business)
Bankruptcy exit financing has become a site of recurring conflict in the intra-class creditor skirmishes that now so often mark corporate reorganization. When creditors in an ad hoc group sufficiently large to accept a plan of reorganization on behalf of an impaired class agree to underwrite, or “backstop,” the debtor’s plan-contemplated capital raise, creditors who hold identical claims but are excluded from the backstop group cry foul that the Bankruptcy Code bars their unequal treatment. All-or-nothing arguments have proved unsatisfying, however, because, on the best reading of the Code, the merits depend on a matter of fact that is not readily ascertainable: is the debtor offering backstop parties a competitive risk-adjusted return for the risk they will bear, or something more?
This article reports the results of a study of the returns to equity rights offering backstop commitments in 49 bankruptcies since 2016. We find evidence that backstop parties face little risk and garner strong positive returns on their capital commitments. For example, the value of the securities sold in an offering exceeded the exercise price in 18 of the 19 deals for which an arm’s-length estimate of value is available—on average by a factor of 2. We estimate that, on average, backstop creditors realized 16 cents per dollar of eligible claim more than did similarly situated creditors who participated optimally in the offering but were not part of the ad hoc group. Although the small sample size warrants caution in interpretation, our results indicate that backstop parties in the typical case are compensated for more than their willingness to risk capital.
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