Emory Bankruptcy Developments Journal


Alliance politics have always been a complicating factor in corporate restructurings. Negotiations between and among large groups of corporate stakeholders naturally require that parties expend time and resources on building coalitions, overcoming holdouts, and fleshing out their collective action. But recent trends suggest that alliance politics—rather than sound financial and economic decisions—may be driving restructuring outcomes, introducing new risks and inefficiencies in the financial markets. For instance, restructuring proponents increasingly use wedge strategies and divide-and-conquer tactics to exacerbate the coordination problems that lenders in large syndicates already face, giving rise to hostile restructurings that have the potential to introduce dangerous ripple effects in the capital markets. These strategies succeed because they introduce new opportunities for lender defection from the syndicate, essentially recasting the high-stakes coordination game played by lenders and driving up strategic uncertainty. By design, these transactions siphon value away from senior creditors, ultimately causing capital market participants to behave in inefficient ways. They may also enable economically wasteful restructurings by overpowering senior lender groups that would have collectively (and rightfully) pushed a company to liquidate. These developments call for a renewed focus on the role of alliance politics in corporate debt restructuring. This Article contributes to these efforts, laying the conceptual groundwork for subsequent works that explore other dimensions of the complicated, high-stakes relationships that make up the modern firm’s capital structure.