Finance Seminar（2019-32)

Topic: Rent extraction by super-priority lenders

Speaker: Wei Wang,Smith School of Business, Queen's University

Time: Wednesday, 27 November, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

We present striking evidence of supra-competitive pricing of debtor-in-possession (DIP) loans obtained by large firms filing for Chapter 11 bankruptcy. Fully collateralized and with super-priority and strong covenants, these loans are effectively near-risk-free: over the past three decades, all but one DIP loan were fully repaid (principal and interest). Nonetheless, loan spreads average a whopping 600 basis points, which is 70% higher than average spreads in high-risk leveraged loans obtained by the same firms over a three-year period prior to Chapter 11 filing. Equally surprising, the rent extraction in DIP loans is highest for new (non-prepetition) lenders-hedge funds or private equity funds in particular which is when lender competition ought to be at its strongest. Junior claimants often contest DIP-loan terms in court but apparently to little avail.

Introduction：

Dr. Wei Wang is an associate professor and RBC fellow in finance, and the founding director of Master of Finance–Beijing program at the Smith School of Business at Queen's University (Canada). His primary research expertise is in corporate restructuring, bankruptcy, leveraged finance, and distressed investing. His papers have been published in top finance journals and featured in prominent media including the Wall Street Journal, Dow Jones Newswires, and South China Morning Post. His coauthored book with Edward Altman and Edith Hotchkiss, “Corporate Financial Distress, Restructuring, and Bankruptcy”- the definitive guide to the science behind what happens when businesses fail, was published in March 2019.

He has published many finance case packages for the Harvard Business School. These cases cover a wide range of corporate finance topics, including working capital management, short-term financing, capital structure, corporate valuation, payout policy, corporate restructuring, and merger& acquisitions and have been adopted by many schools internationally. During his visit at the Wharton School of University of Pennsylvania in 2015 and 2017, he taught corporate restructuring, distressed M&A, and distress investing in their undergraduate, MBA, EMBA, and ExecEd programs. He was a visiting associate professor at the Hong Kong University of Science and Technology Business School from 2015 to 2016. He worked in commodity derivative trading and financial engineering prior to the academic career.

http://web.business.queensu.ca/Faculty/wwang/index.html

Your participation is warmly welcomed!