Debt Restructuring with Multiple Bank Relationships

When the debt of distressed firms is dispersed, free riding makes it difficult to reach a restructuring agreement. We develop a multistage game in which banks come across each other frequently, allowing them to threaten punishment in case of free riding. As the number of banks grows, the chance of re-encountering a bank and of being punished for free riding increases, improving the likelihood of cooperation. Looking at Italian firms in distress, we find that the restructuring probability increases with the number of banks up to a threshold - around three banks - beyond which coordination problems prevail