Getting to Yes: The Role of Coercion in Debt Renegotiations

A debt contract’s value depends on the parties’ ability to alter its terms. But although the rules of alteration are for that reason an important part of the design of debt instruments, the academic literature lacks an analytical framework. Recent upheavals in restructuring practice have emphasized the practical importance of a working theory of alteration, however, and in particular of the rules governing what debtors can do to procure creditor acquiescence to proposed changes.

This article develops a comprehensive account of the methods of consent solicitation broadly construed. We offer four principal contributions. First, we identify in general terms the features of a solicitation that can produce coercive dynamics and analyze the kinds and degrees of coercion embedded in notable solicitation methods. Second, we document the persistent availability of coercive methods under standard bond and loan contracts despite known means to prohibit them. Third, we show that that economic considerations can justify coercion and might explain some observed contract practices. Fourth, we conclude that the most coercive prevailing techniques cannot be so easily justified and propose an approach to construing debt contracts that would restrain what are likely the most value-destructive solicitation methods without condemning longstanding and plausibly value-enhancing techniques.