Creditors, Plan Confirmations, and Bankruptcy Reorganizations: Lessons from Slovenia

Creditors often critically shape the fate of bankruptcy reorganizations, yet the drivers and implications of creditors' reorganization plan confirmations are still not completely understood. Exploring micro-level data on bankruptcy reorganization proceedings in Slovenia, we find that creditors, above all, demand a credible change in the exercise of control rights. The prospects of plan confirmation are positively associated with debt-to-equity conversion as well as those majority ownership changes that occur during the proceeding and feature a domestic incoming owner. In contrast, we find no evidence that plan confirmation is related to management turnover, majority ownership transfers involving a foreign incoming owner, pre-bankruptcy financial indicators other than leverage, the number of creditors, the value of different types of claims, and even the contractual details for the repayment of claims. The incidence of creditor-induced socially costly filtering failures is quite high, with estimates ranging between 41 and 78% based on the ex-post approach and between 40 and 61% based on the ex-ante approach. Confirmations of plans from non-viable businesses are more prevalent than rejections of plans from viable businesses. Our results provide a novel perspective on the creditors' role in the resolution of business bankruptcy.