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Transparency around exit costs across Europe

Transparency around exit costs across Europe. Karin S. Thorburn Dartmouth College. Objective of bankruptcy. Restructure economically viable firms Terminate unprofitable operations and reallocate assets to higher-value use Do this as cost-efficiently as possible. Bankruptcy costs.

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Transparency around exit costs across Europe

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  1. Transparency around exit costs across Europe Karin S. Thorburn Dartmouth College

  2. Objective of bankruptcy • Restructure economically viable firms • Terminate unprofitable operations and reallocate assets to higher-value use • Do this as cost-efficiently as possible Karin Thorburn, Dartmouth College

  3. Bankruptcy costs • Direct costs • Lawyers, bankers, court hearings • Indirect costs • Decline in sale, loss of employees, etc. • Inefficient allocation of assets • Continuation versus liquidation • Fire sales • Delayed filing and risk-shifting incentives • Predictability/transparency of proceedings Karin Thorburn, Dartmouth College

  4. EU insolvency regulation • Regulation on Insolvency Proceedings • Rules for cross-country proceedings • Main insolvency proceedings in member state where firm has its “center of main interest” • Secondary proceedings in other member countries, limited to winding up assets and run parallel to main proceedings • No harmonization of bankruptcy law between different EU countries Karin Thorburn, Dartmouth College

  5. Bankruptcy systems • Reorganization codes (US, France) • Formal framework to renegotiate claims • Incumbent management retains control • Equityholder friendly • Auction codes (Sweden, UK) • Sale of the firm in a mandatory auction • Creditor rights at the forefront Karin Thorburn, Dartmouth College

  6. France • Court appoints an administrator • Objectives are firm continuation, job preservation and, third, creditor claims • Automatic stay, super-priority debt • Creditors are removed from process • Tax and employee claims take priority to proceeds from secured assets Karin Thorburn, Dartmouth College

  7. Germany • 3-month grace period from creditors • Administrator contrives a reorganization plan • Approval from creditors by majority vote • Court may cram down on dissenting creditors Karin Thorburn, Dartmouth College

  8. The UK • Secured creditor appoints receiver • Receiver looks after the interests of the secured creditor • Receiver decides whether to restructure firm or sell assets • No automatic stay or super-priority financing Karin Thorburn, Dartmouth College

  9. Sweden • Mandatory auction of firm as a going concern or piecemeal • Automatic stay of debt and super-priority financing • Buyer decides whether to retain incumbent management • Payment in cash Karin Thorburn, Dartmouth College

  10. Reorganization code • Pros: • Encourages management to file early • Cons: • Joint negotiation of firm value, use of assets and creditor payoffs risks prolong the bankruptcy procedure • Inefficient continuations • Less transparent Karin Thorburn, Dartmouth College

  11. Auction code • Pros: • Assets are valued by the market • Highest bidder decides use of assets • Cash allows payoffs following APR • Cons: • Asset fire sales • Delayed filing and excessive risk-shifting Karin Thorburn, Dartmouth College

  12. Direct and indirect costs • Swedish auctions speedy—2 months— and relatively low cost (Thorburn 00) • UK bankruptcy higher direct costs (Franks and Sussman 04) • Lowest debt recovery rates in France, highest in UK and Sweden (Davydenko-Franks 04, Thorburn 00) Karin Thorburn, Dartmouth College

  13. Inefficient continuation and liquidation • France: too much continuations? • UK, Germany: too many liquidations? • Sweden: buyer decides, so no real distortion of incentives • Most liquidations in French bankruptcy (Kaiser 96, Davydenko-Franks 04) • Auctioned firms perform well (Eckbo-Thorburn 03) Karin Thorburn, Dartmouth College

  14. Asset fire sales • UK, Sweden: depressed prices? • Managers repurchase assets in period of industry distress (Stromberg 00) • Secured creditors provide liquidity to competing bidders (Eckbo-Thorburn 04) • Auction prices do not vary with fire-sales variables in continuation sales (Eckbo-Thorburn 06) Karin Thorburn, Dartmouth College

  15. Delayed filing • UK, Sweden: excessive risk-shifting? • France: encourages early filing? • Managerial incentives to retain control benefits (Eckbo-Thorburn 03) • Personal liability for late action Karin Thorburn, Dartmouth College

  16. Out-of-court solutions • France: many workouts? • UK, Sweden: few workouts? • Similar rates of bankruptcy filing for defaulted firms across UK, Germany and France (Davydenko-Franks 04) • German banks form bank pools to facilitate voluntary workouts (Brunner-Krahnen 04) Karin Thorburn, Dartmouth College

  17. Recent reform • EU encourages its member countries to strengthen their provisions for reorganization • Recent reforms in many European countries undermine creditor rights and decrease transparency in exit costs • US development towards using market mechanisms (Baird-Rasmussen 04) and increased transparency Karin Thorburn, Dartmouth College

  18. Summary • Different bankruptcy codes impose different costs on distressed firms • French reorganization code appears to fail successfully restructuring firms • Swedish auction code seems relatively low-cost and transparent, along with UK code • Is reform in Europe going in the wrong direction? Karin Thorburn, Dartmouth College

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