Lenders to bankrupt firms are increasingly demanding the use of a controversial contract clause that bolsters their investments in exchange for giving companies a chance at survival, Bloomberg News reported. Known as a roll-up, the provision moves existing debt to the front of the repayment line in lockstep with newly lent money. Senior lenders often require the maneuver when no one else is willing or able to give a bankrupt company turnaround financing. The structure is divisive because it frequently soaks up the scraps an insolvent company hasn’t yet put up as collateral, and which could have helped repay lower-ranking creditors. Rolled-up debt also has to be repaid in cash, limiting the restructuring options available to the borrower. But more and more, bankrupt firms and the judges overseeing them are being forced to accept roll-ups because without new cash, they risk shuttering entirely. The trend is a sign that lenders are amassing more leverage over failed companies as the rates of corporate default and bankruptcies climb. “I hate those things,” said Bruce Markell, a former bankruptcy judge who is now a professor at Northwestern Pritzker School of Law. “It’s a great strategy, you know — if you’re the lender. It’s a game of chicken in the sense that the debtor says, ‘we’re going down unless this happens.’” Although the provision has been around for years, roll-ups are becoming bigger and more prevalent, according to figures compiled by BankruptcyData. The proportion of chapter 11 cases that involve the maneuver has steadily increased since 2021, according to the research.
