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Matt Levine

Mattress Company Stiffs Some Lenders

Also Tesla shorts, nerve gas, and rap and ice errata.

Sometimes companies have a lot of debt and run into trouble. A bad thing happens and they cannot handle their debt anymore. Maybe they’d like to have less debt, and they go to their lenders and say “can we pay you back less than we promised?” Maybe they’d like to have more debt—that is, they need money—and they go to their lenders and say “hey I know we are overleveraged and blowing our covenants but can we borrow more money anyway?” Maybe they’d like more time to pay back their debt, or they’d like to pay less interest. 

On first principles the way to deal with this problem is to go to all your lenders and explain how it’s in everyone’s interest to renegotiate the deal. “If you forgive some of our debt (or lend us more, or extend our terms, or whatever), we will survive and be able to pay you back the rest; if you don’t, we’ll go under and you’ll be tied up in bankruptcy and recover much less,” is the basic pitch. The lenders evaluate this pitch and, if they think it’s correct, they agree to help you out. This is a positive-sum game, or I guess a minimizing-of-negative-sums game; a solution can be in everyone’s interest.