Efficiency and Distribution in Financial Restructuring: The Case of the Ferruzzi Group

Abstract

This paper analyzes the efficiency and distributional consequences of the largest out- of-court restructuring ever ($20 billion of debt). The restructuring was engineered by a five-bank committee composed of the largest creditors, which took effective control of the company at the onset of financial distress. We compare the payoffs obtained by creditors under the restructuring plan with those they would have obtained in the absence of it. We show that the plan implied a large redistribution among creditors with equal priority. This redistribution occurred without generating any apparent efficiency gain. When we factor in the value of control, we find that the restructuring plan favored the Restructuring Commit- tee, at the expense of other banks. Our analysis shows the importance of the allocation of control in financial restructuring and the possible efficiency costs of debt for equity swaps in restructurings. We discuss the implications of these findings for the debate on the optimal bankruptcy procedures.