Creditor Coalitions in Bankruptcy

Bankruptcy is a high-stakes game of negotiation, where power dynamics among creditors can shape the restructuring process and influence financial outcomes. In recent years, creditor coalitions have emerged as game-changers in Chapter 11 proceedings, altering the way distressed firms restructure their debt. Despite their growing significance, these coalitions remain largely unexplored in academic research. This study is the first to systematically investigate their role, addressing two critical questions: (1) what drives creditor coalition formation in bankruptcy, and (2) how do creditor coalitions impact key outcomes, such as recovery rates and delays in bankruptcy resolution?

The Rise of Creditor Coalitions

Creditor coalitions—particularly ad hoc committees that form voluntarily and flexibly—have become an essential mechanism for coordination in an otherwise fragmented creditor landscape. When creditors hold diverse and often conflicting claims, coalitions can serve as a vehicle for collective action, allowing members to consolidate bargaining power, streamline negotiations, and reduce inefficiencies.

Using a theoretical framework, this study predicts that coalition formation is influenced by several key factors, including debt size, creditor dispersion, creditor type, market liquidity, and the history of prior interactions among creditors. Specifically, coalitions are more likely to emerge in cases involving larger creditor classes, dispersed ownership structures, or illiquid debt. In these scenarios, coalitions help creditors overcome coordination failures, mitigate transaction costs, and enhance their negotiating position against the debtor or competing creditor groups. Additionally, familiarity among creditors from past restructuring interactions encourages coalition formation, as trust and cooperation are easier to establish. Conversely, coalitions are less attractive when banks hold large portions of debt, as regulatory constraints often prompt these creditors to sell their defaulted claims quickly—typically at a discount—rather than participate in prolonged negotiations.

Empirical Evidence: Do Creditor Coalitions Matter?

Our study moves beyond theoretical predictions by providing empirical evidence on coalition behaviour and its consequences. Leveraging novel data from court filings—particularly Rule 2019 disclosures, which detail creditor holdings and coalition memberships in U.S. Chapter 11 cases—the study offers insights into coalition dynamics.

The findings confirm that coalition formation aligns closely with the theoretical drivers identified earlier. Moreover, the study documents that when coalitions are publicly announced, bond prices tend to rise, reflecting that markets expect better recoveries when coalitions are involved. Importantly, empirical findings reveal that coalitions enhance recoveries not just for their own members but often for the firm as a whole, as demonstrated by significant positive returns for bonds across creditor classes following coalition announcements.

However, coalitions are not merely cooperative entities; they are also strategic actors, often engaging in complex negotiations that can both facilitate and complicate bankruptcy proceedings. The study highlights how coalition behaviour evolved following the landmark 2017 Peabody court ruling, which altered within-class equality rules in creditor recoveries.

This decision reshaped coalition incentives. Following Peabody, coalitions grew in size and influence, and class recoveries improved. However, the downside was also evident: larger coalitions fuelled creditor disputes, extended case resolution timelines, and increased litigation risks. This escalation of creditor conflicts—sometimes termed ‘creditor-on-creditor violence’—underscores the double-edged nature of coalitions. While they enhance creditor coordination and improve outcomes for members, they can also introduce inefficiencies and prolong the restructuring process.

Policy and Practical Implications

Given the rising influence of creditor coalitions, their implications for bankruptcy law and corporate restructuring cannot be overlooked. On one hand, coalitions provide clear benefits by improving creditor coordination and increasing recoveries. They can also offer a counterbalance to dominant stakeholders, ensuring that smaller or dispersed creditors have a collective voice in negotiations. On the other hand, the presence of coalitions introduces new risks. The potential for extended litigation and strategic holdout behaviour can complicate the bankruptcy process.

For policymakers, understanding the trade-offs involved in creditor coalition participation is crucial. Should regulatory interventions encourage coalition formation to promote creditor coordination, or should they impose guardrails to prevent strategic exploitation and prolonged bankruptcy delays? Similarly, for practitioners, navigating modern Chapter 11 cases requires a nuanced approach—one that accounts for both the strategic benefits and potential pitfalls of creditor coalitions.

Conclusion

As creditor coalitions become an increasingly dominant force in bankruptcy proceedings, their role in shaping financial outcomes continues to grow. This study offers a first-of-its-kind systematic analysis, demonstrating that coalition formation is driven by creditor characteristics, market conditions, and legal frameworks. While coalitions can enhance recoveries and improve coordination, they also introduce new complexities, including increased litigation and restructuring delays. For investors, restructuring professionals, and regulators alike, understanding the economics and strategies of creditor coalitions is essential for navigating today’s bankruptcy landscape.

The authors’ complete paper can be found here.

Jing-Zhi Huang is a Professor of Finance and Mathematics at the Department of Finance at the Pennsylvania State University.

Stefan Lewellen is an Assistant Professor of Finance at the Department of Finance at the Pennsylvania State University.

Zhe Wang is an Assistant Professor of Finance at the Department of Finance at the Pennsylvania State University.