Publicly Offered Debt in the Shadow of Insolvency

Abstract

Publicly offered debt has widely replaced the commercial bank loan for larger ventures. Adverse effects of this development surface in case of – real or assumed – financial distress. A fragmented, steadily changing (secondary market trading), anonymous and heterogeneous body of creditors confronts all concerned parties with severe economic challenges. Ex ante, the risk of debtor’s misbehaviour will increase if the debtor can hide its action, since information and coordination problems arise because of a cloudy body of creditors. Ex post, dilemma structures, opportunistic behaviour and in particular collective action problems inhibit an economically efficient restructuring. The purpose of this paper is to provide a framework to comparatively analyse solutions to the problems posed by a cloudy body of creditors. The analysis will focus on the UK and explore as to whether the private ordering contractual mechanism can gain the edge over the traditional public ordering procedures in case of publicly offered and traded debt. The framework for comparative analysis of public and private ordering can be applied to analyse the problems of ‘publicly offered debt in the shadow of insolvency’ in other jurisdictions.