Selection Between Workouts and Court-administered Proceedings in Corporate Financial Restructuring

From around the last half of the 1990s, the proportion of bank-led workouts on debts held by troubled companies has been decreasing, while there has been a sharp rise in the number of cases of court-administered reorganization proceedings under the Corporate Reorganization Law or the Civil Rehabilitation Law. This paper empirically analyzes the effects of debt composition on the selection of workouts or court-administered reorganizations with respect to Japanese companies subjected to either workouts or court-administered reorganization proceedings between January 1997 and December 2003, using these companies' financial data for the business term immediately prior to bankruptcy. Workouts with debt relief from creditor banks have been applied primarily to large-scale companies. On the other hand, court-administered reorganization is more likely to be selected than workouts when a significant portion of outstanding debts is from the state-controlled Long-Term Credit Bank of Japan and its successor Shinsei Bank, or when the proportion of bonds as a share of total debts is relatively high. Also, the proportion of unsecured loans is significantly higher for sample companies in workouts cases than those of court-administered reorganization cases. With respect to relationships with main creditor banks, the greater the share of outstanding debts held by the leading creditor bank, the greater is the possibility that workouts will be selected for reorganizing the debtor company. It is hoped this paper, which is a rare attempt to analyze the selection of either workouts or court-administered proceedings in corporate reorganization, will make meaningful contribution to exploring ways to reorganize Japanese companies in the future.