Financial stability consequences of strengthening the legal rights of secured creditors under the EU Preventive Restructuring Directive

A key goal of the Capital Markets Union (CMU) Action Plan is to establish a functioning bond market, offering businesses finance options beyond traditional bank loans and creating a stable source of financing for the real economy across the EU. To support this, the EU has introduced the Directive on Preventive Restructuring Frameworks to facilitate restructuring possibilities for distressed firms. While this is a positive step, there is a risk of undoing any progress made in creating a vibrant bond market. In the absence of a proper power balance among stakeholders in restructuring, a shift towards more legal rights in favour of secured creditors could significantly weaken the legal position of unsecured creditors, as it could result in less value and control for these creditors. This is particularly relevant given that the corporate bond market is composed predominantly of unsecured bonds. The implications of strengthening the position of secured creditors for the position of bondholders are often overlooked because Europe is much more of a bank‐financed debt market and can be seen as still being in its early phase of significantly expanding the bond market. This paper analyses how the shift in power balance in restructuring in favour of secured creditors weakens the legal position of unsecured bondholders, with a focus on the position of secured creditors under the Preventive Restructuring Directive. It further discusses how the failure to maintain a proper balance in restructuring procedures could have stability implications for both unsecured bondholders and the overall economy. Strengthening secured creditors' rights could make companies more reliant on bank loans, exposing them to banking system shocks. Furthermore, uncertainty around these reforms might lead to improper risk pricing in bonds, potentially triggering fire sales when risks materialize.