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The Parmalat case and the recent bankruptcy reform

The Parmalat case and the recent bankruptcy reform. Lorenzo Stanghellini Facoltà di Giurisprudenza dell’Università di Firenze (*). Colloquium IEEI, Rome, 19 maggio 2006 (*) lorenzo.stanghellini@unifi.it. Part 1 . The Collapse of Parmalat. Parmalat’s position in 2003.

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The Parmalat case and the recent bankruptcy reform

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  1. The Parmalat case and the recent bankruptcy reform Lorenzo Stanghellini Facoltà di Giurisprudenza dell’Università di Firenze (*) Colloquium IEEI, Rome, 19 maggio 2006 (*) lorenzo.stanghellini@unifi.it

  2. Part 1 • The Collapse of Parmalat

  3. Parmalat’s position in 2003 • Leading Italian food group • Parent company listed • 51% owned by the Tanzi family • Truly international business • 32 countries, 36 operating companies, 132 locations • Fifth Italian bond issuer (€ 7.0 bn, a part of which publicly rated)

  4. 2003: the first cracks • Balance-sheet 2002: € 3.5 bn liquidity • February: a new bond issuance (300 ml) is turned down for lack of sufficient information • CFO resigns but remains on board • November: Supervising authorities ask clarifications about liquidity • Deloitte casts doubts over financial statements

  5. December 2003: The collapse • 9th: Enrico Bondi, a turnaround specialist, is hired by Tanzi and the board • 12th: Parmalat shares plunge; a € 150 ml bond is reimbursed • 15th: Tanzi resigns, Bondi takes on as Parmalat’s President • 19th: BOA denies Parmalat’s account with BOA holding substantial liquidity • 23rd: Italian Government enacts an emergency bankruptcy law for very large firms (>1,000 empl.) • On the same day, Parmalat files for bankr. protection; Bondi is appointed commissioner

  6. Parmalat’s collapse:Why? How? • Why the people did it? • At least for the “core” actors (Tanzi), it is not easy to tell • How could they do it? • Bad corporate governance • Ineffective external checks • Stock market • Auditors • Incremental lenders

  7. Part 2 • The Rescue of Parmalat

  8. A good candidate for rescue • 32,000 employees • More people and firms dependent on Parmalat’s continuing operations • Business in equilibrium (decision on rescue based on assets, not liab.) • Liquidation was simply not an option

  9. Italian insolvency law (before) • Allowed continuation of business under court supervision and protection from creditors • Allowed industrial restructuring and “super-priority” financing • Did not allow for financial restructuring • Only real option under existing law: sale of Parmalat as a going concern

  10. Italian insolvency law (after): d.l. 347/2003 and Law 39/2004 But: • Selling large businesses is difficult • Often yields fire-sale prices • Law amended to allow financial restructuring, including debt-equity swap (Law No. 39-2004) • Debt-equity swap proposed to creditors: Parmalat would be “sold” to its creditors

  11. Parmalat insolvency:The restructuring plan • The plan encompasses 16 companies of the Parmalat group • Combined assets valued € 1.5 bn (“enterprise value”) • Total liabilities € 25.5 bn (with duplications for intra-group guarantees and loans: net liab. around € 14 bn)

  12. Parmalat insolvency:The restructuring plan (2) Following a majority vote of the creditors (August-September 2005): • Creditors’ claims have been reduced • According to the asset/liability ratio of each of the 16 companies: some 100%, some almost zero • A Newco has been set up • Liabilities (reduced to € 1.5 bn to equal enterprise value) have been transferred to Newco together with assets, at no cost

  13. Parmalat insolvency:The restructuring plan (3) • Unsecured credits. of 16 comp. have received Newco’s shares in settlement of claims • Forced debt-equity swap (creditors will receive shares, plus 1 warrant per sh. up to the first 650) • Secured creditors (plus administr. expenses) have been fully paid in cash by Newco (€ 204 ml) • Newco has emerged with an almost all-equity financial structure • Newco has finally been listed (Oct. 2005) • New Parmalat’s corporate governance according to international best practices

  14. Parmalat insolvency:sheer technical complexity • Hundreds of companies in different jurisdictions • Hard test for EU Reg. 1346/2000 (Eurofood plc): ECJ decision on 2nd May 2006 • Coordination of non-EU procedures (Brazil, US) • No “consolidation” of the group • The intra-group distribution of assets and liabilities is taken as a “snapshot” • No subordination of large intra-group claims

  15. Parmalat insolvency:sheer technical complexity (2) • Liability suits against Parmalat in US • claimants bound by the plan? • Liability suits (and avoidance actions) by Parmalat against directors, auditors, and banks • Potentially, a big source of recovery

  16. Part 3 • Italian Law after Parmalat

  17. Parmalat: Any lessons to be learnt? • Availability of procedures that allow efficient financial restructuring is crucial • Distribution of value is difficult • Valuation of an insolvent firm is difficult • Multiple valuations are even more so • Keeping management of distressed firms is important ex-ante, but less so ex-post in large companies • “Rehabilitation”: What does it means?

  18. Parmalat: Any lessons to be learnt? (2) • Creditors’ committee necessary to achieve consensus • Unfavourable international press (see, e.g.,“Global Turnaround” March 2004) • A Newco necessary to get around the necessary shareholder’s vote • ECJ Pafitis v. Banca Trapeza (1993)

  19. Parmalat case: What it does NOT tell • Parmalat needed “pruning” and turnaround • Business was profitable (albeit much less than told) • Therefore: no “tragic choice” (creditors vs. employees/suppliers) has been necessary • Alitalia (more than 20.000 employees and significant operating losses) would be a much more problematic case…

  20. … however, Parmalat was an “easy” case: The business was profitable • Financial statements 2002-2003 revised by PWC (press release 26 January 2004):

  21. The new composition procedures: (a) The “Concordato preventivo” • Decree-Law 14 March 2005, n. 35: New “concordato preventivo” • Plan by the debtor to avoid the bankruptcy procedure (“Fallimento”) through a composition with the creditors • High degree of flexibility, classes of creditors • No constraints on financial restructuring proposals by the debtor • Debt for equity swap possible pursuant to a majority vote • New Art. 160 of bankruptcy is taken almost literally from Art. 4-bis l. 39/2004 (Parmalat law)

  22. The new composition procedures: (b) The “Concordato fallimentare” • D.lgs. 9 January 2006, n. 5: the new “concordato fallimentare” • Plan by the debtor, any creditor or third party, to close the bankruptcy procedure (“Fallimento”) • Same potential for restructuring of the new “concordato preventivo” • New concept of “concordato”

  23. The legacy of Parmalat • A “giant leap forward”. Now let us consolidate • Reform of general bankruptcy law by d.lgs. 9 January 2006, n. 5: an important work in progress • Generalize Parmalat: NO, thanks • Creditors have been kept out of the door • Called upon at the end for a vote on a plan “take it or leave it” • The success of Parmalat turnaround is due to the business and the people who worked on it. Now it’s enough…

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