No. 387 - Debtor-in-possession financing and credit priority: the effects of the preferential status granted by law in a compositionwith creditors

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by Elisa Brodi and Luca CasolaroSeptember 2017

The work evaluates from a legal and economic perspective a number of provisions designed to promote debtor-in-possession financing to firms involved in a composition with creditors (concordato preventivo).

Since 2010, several reforms have progressively extended the scope of preferential status for such credits. The research focuses on loans granted by professional lenders to firms whose composition plans were approved by the courts between 2006 and 2014. The econometric analysis shows that the measures have reduced the credit restriction (by 2 percentage points) and lowered its cost (with interest rates falling on average by 40 basis points).

This outcome is mostly due to the liquidity provided by lenders that were not previously exposed to the distressed firm. However, some legal obstacles – such as, for instance, the possibility of the preferential status being reversed if a bankruptcy proceeding is initiated – could prevent further funds from being provided.

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