Bankruptcy costs, leverage and multiple secured creditors: the case of management buy-outs

Using a unique, hand-collected final dataset of 57 management buy-outs in distress, this paper analyses the determinants of bankruptcy costs under the UK's receivership regime. We show that the direct costs of receivership consume a significant percentage of the receivership proceeds, with mean receivership costs equal to 30% of receivership proceeds. Importantly we find that while the average length of receivership was 3.0 years, 95% of repayments are made on average within 1.9 years. Our findings do not Support the argument that multiple lenders create inefficiencies resulting in significantly lower Secured creditor recovery rates. However, when there are multiple secured lenders, the senior Secured lender gains at the expense of other secured creditors. We find that receivership costs are positively related to the proportion of secured debt repaid and that, consistent with the presence of a scale effect, the relative significance of receivership costs declines as firm size grows. Receiverships last longer the larger the amount of debt owed to the secured lenders.