DP3915 | Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

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We use a unique data set to analyse how UK banks deal with small to medium size distressed firms both inside and outside bankruptcy. The approach to bankruptcy is contract-based, with lenders and borrowers relying on procedures written into the debt contract, and where the courts are largely uninvolved. We find that firms in our sample have highly concentrated debt structures and liquidation rights. As a result, the rescue process is largely free of coordination failures and creditors? runs. We find that the principal lender, ?the bank?, makes few concessions to the borrower and that there is a virtual absence of debt forgiveness. Finally, the bank relies heavily on the highly collateralized value of its loan in making the decision to place the distressed firm in bankruptcy.