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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

Transparency around exit costs across Europe

Karin S. Thorburn

Dartmouth College

objective of bankruptcy
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

bankruptcy costs
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

eu insolvency regulation
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

bankruptcy systems
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

france
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

germany
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

the uk
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

sweden
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

reorganization code
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

auction code
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

direct and indirect costs
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

inefficient continuation and liquidation
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

asset fire sales
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

delayed filing
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

out of court solutions
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

recent reform
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

summary
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