Publication Date
2023
Publication Title
University of Pennsylvania Law Review
Abstract
he lack of comprehensive response to a recent wave of non-pro rata refinancing transactions poses theoretical as well as practical puzzles. Most market participants seem to think that workout negotiations at least presumptively ought to treat creditors in a bond or a loan facility equally. Yet more than two years after it became clear that debtors would consider non-pro rata deals, and despite evidence that clever advisors might be able to circumvent contractual changes addressed to a specific non-pro rata transactional form, no effort to ensure equal treatment generally has taken hold. Why not?
This essay offers an optimistic account of the status quo. A common, fatalistic attitude supposes that participants in the leveraged debt markets lack the institutional tools to course correct. Ironically, though, the persistence of non-pro rata dealmaking may be a function of there being too many, rather than too few, efficacious answers. Contract drafters, distressed asset managers, and judges each have the means to put a stop to wealth-destroying non-pro rata transactions. The problem is that it is hard to know a priori whether the most targeted responses will prove feasible. Because time will tell, the value-maximizing strategy for actors with relatively blunt tools may be to wait and see. Temporary inaction might thus reflect prudent epistemic modesty rather than institutional paralysis. A prediction follows: courts or contract drafters will soon rule out non-pro rata deals generally if asset managers do not figure out how to sort net-valuable from net-costly transactions on a case-by-case basis.
Recommended Citation
Vincent Buccola, "Efficacious Answers to the Non-Pro Rata Workout," 171 University of Pennsylvania Law Review 1859 (2023).
