The Impact of Investment Banking Advisory in Chapter 11 Bankruptcy Open Access

Abstract

After the dotcom bubble implosion from 2000 to 2002, the restructuring and workout business was not very active leading up to the mid-2000’s. However, the Great Recession of 2007 tightened credit and consumer spending, and led to a wave of corporate defaults which were resolved in the courts under primarily Chapter 7 and Chapter 11 bankruptcy proceedings. Investment banking firms are often hired by corporations in Chapter 11 proceedings to assist in procuring financing so that the company may continue to operate while their business is restructured in the courts. A typical form of super-senior loan with special rights for creditors during the Chapter 11 process is a Debtor-in-Possession (DIP) loan. This study seeks to determine the relationship between macroeconomic factors, bankrupt company financial conditions, and financials of the investment banking advisor in several multi-factor models with 0-2 years of lag, to the size, loan-to-value (LTV), and time to receive a DIP. The findings of this study show that while increasing and decreasing financial leverage of the institutional investment bank is linked to longer time for a company in Chapter 11, the size and LTV of DIP financing is more significantly affected by global macroeconomic conditions and corporate financial data, primarily net balance sheet liabilities and sales, upon entering bankruptcy. 

Table of Contents

BANKRUPTCY BACKGROUND .................................................................................. 1

INTRODUCTION ............................................................................................................ 5

RELATED LITERATURE.............................................................................................. 9

DATA ............................................................................................................................... 14

RESULTS ........................................................................................................................ 20

Multicollinearities ............................................................................................................. 20

Overarching Model ........................................................................................................... 21

Macroeconomic Condition Model .................................................................................... 22

Distressed Corporation Conditions Model........................................................................ 23

Investment Banking Advisory Model ............................................................................... 25

CONCLUSION ............................................................................................................... 30

CITATIONS .................................................................................................................... 31

APPENDIX .......................................................................................................... 34

Table 1: Effect of Macroeconomic Conditions on DIP LTV and Total Days to Resolution...........34

Table 2: Effect of Company Conditions on DIP Sizing...................................................................35

Table 3: Effect of Company Conditions on Bankruptcy Timing.....................................................36

Table 4: Total Model vs. All Dependent Variables [Lag 0] ............................................................37

Table 5: Total Model vs. All Dependent Variables [Lag 1] ............................................................39

Table 6: Total Model vs. All Dependent Variables [Lag 2] ............................................................41

Figure 1: Summary Statistics of Key Independent Variables of Interest.........................................43

Figure 2: Correlation of Macroeconomic Variables ........................................................................44

Figure 3: Correlation of Company Financial Characteristics ..........................................................45

Figure 4: Correlation of Investment Banking Characteristics..........................................................46

Graph 1: Scatter Plot of DIP LTV vs. Debt-to-Asset Ratio.............................................................47

Graph 2: Scatter Plot of Bankrupt Companies in Dataset, 2000-2018 (by Sector)..........................48 

About this Honors Thesis

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School	Emory College
Department	Economics
Degree	B.A.
Submission	Honors Thesis
Language	English
Research Field	Business Administration, Banking Economics, Finance
Keyword	debtor-in-possession Chapter 11 bankruptcy investment banking financing
Committee Chair / Thesis Advisor	Zhonjian Lin, Emory University
Committee Members	Frederic Bien, Emory University Samiran Banerjee, Emory University

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