Restructuring Agreements Research Articles

Rescuing Icarus: the European Commission's approach to dealing with failing firms and sectors in distress

In Greek mythology, Icarus is given wings made of feathers and wax by his father as a means to escape exile. Experiencing flight for the first time ashe makes his escape, Icarus dares to fly too near the sun despite his father's warnings not to do so. His wax wings melt in the heat and Icarus consequently plunges to his death in the sea. The Commission is faced with a challenging task when dealing with firms in financial distress, some of them with falls befitting Icarus. This article focuses on three such concrete situations that the Commission has to manage: the “Failing Firm Defence” in merger control cases, restructuring agreements in declining sectors (also called “crisis cartels”) assessed under Article 101 TFEU, and undertakings’ inability to pay fines under point 35 of the Fining Guidelines. In all three situations, the Commission carries out a similar assessment of the financial health of the “failing” firm or sector, and in each case, the Commission's approach is rather formalistic. While the Commission advocates the same public policy concern across the board, namely to protect competition in a market, the criteria aimed at doing this are set out slightly differently in each of the three situations. The aim of this article, however, is not to argue for a more relaxed approach to competition policy as the standard, but rather for a more refined pragmatism that would also be more aligned to the effects-based competition enforcement adopted by the Commission in recent years.

Crisis Cartels: Non-Economic Values, the Public Interest and Institutional Considerations

This paper considers the use of non-economic considerations in Article 101(3) analysis of industrial restructuring agreements, using the Commission's Decisions in Synthetic Fibres, Stichting Baksteen, and the recent UK Dairy Initiative as examples. I argue that contra to the Commission's recent economics-based approach; there is room for non-economic considerations to be taken into account within the framework of the European Treaties. The competition law issue is whether the provisions of Article 101(3) can save such agreements. I further argue that there is legal room for non-economic considerations to be considered in evaluating these restructuring agreements, it is not clear who the appropriate arbiter of these considerations should be given the institutional limitations of courts (which have no democratic mandate), specialised competition agencies (which may be too technocratic in focus) and legislatures (which are susceptible to capture by rent-seeking interest groups).

Accounting for Debt Restructuring in the Current Crisis: Italian Experience by Italian Legal Conditions

Since 2007 a financial crisis has hit economies generating inevitable consequences on Italian Companies solvency level. This paper identifies some intermediate solutions purely contractual arrangements for debt rescheduling between debtor and creditors introduced by the Bankruptcy Reform, which considers: recovery and resolution planning ,restructuring agreement, pre-insolvency agreements with creditors. To solve the crisis it is required the adoption of appropriate procedures aiming at the fair presentation in the financial statements. For this reasons Italian Accounting Entity, (OIC) on July 2011 issued a new document OIC 6, “Accounting Principles” which aimed to prescribe the accounting treatment and disclosures, produced by the debt restructuring. Finally, this paper highlights how the OIC n. 6 philosophy has emphasizes the public interest in preserving the firm as an economic value to the community .

Price Effects of Independent Transmission System Operators in the United States Electricity Market

In 1996, the Federal Energy Regulatory Commission sought to “remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation’s electricity consumers” through a series of market rules. A product of these rules was the establishment of regional transmission organizations (RTOs) and independent system operators (ISOs) charged with facilitating equal access to the transmission grid for electricity suppliers. Whether these changes in market structure have succeeded in achieving the FERC’s goal to provide “lower cost power to the Nation’s electricity consumers” remains an open question. We utilize a panel data set of the 48 contiguous United States and a treatment effects model in first differences to determine whether there have been changes in delivered electric prices as a result of the establishment of ISOs and RTOs. To avoid the confounding effects of electric restructuring, we have initially estimated the model with the full panel data set, and then again without the states that have restructured their electric markets. By considering only the states that have not restructured their electric markets, we can see whether there have been price effects due to the establishment of RTOs, in the absence of restructuring agreements. We estimate a model of annual changes in electricity prices using 2SLS and show that electricity prices fall approximately 4.9% in the first 2 years of an ISO’s operation and that this result is statistically significant. However, we further show that this result is dependent on the presence of states that restructured their electricity markets and the accompanying rate agreements and temporal subsidies that may have forced prices below their market rates. When these restructured states are removed from the data set the price effects of RTOs become indistinguishable from zero. We conclude that rate agreements are the source of the observed decrease in prices and that RTOs have not had the desired effect on electricity prices.

Competition policy in periods of economic downturn

This paper attempts to cast light on the main principles of the industrial restructuring agreements (crisis cartels) from a European perspective. For this purpose, I will explore the basic fundamentals of theory of harm concerning the formation of cartels during economic downturn in specific oligopolistic markets and I will analyse basic characteristics of past European cases. I also survey the Greek fish farming crisis cartel case.

Seychelles - Assessment Letter for the African Development Bank

Macroeconomic performance of Seychelles under the Stand-by Arrangement (SBA) has been favorable and the reforms continue to be pursued with a high degree of ownership and broad public support. The liberalization of the exchange regime, a strong fiscal adjustment, and prudent monetary policies have contributed to restoring macroeconomic stability. Program implementation has been exemplary and talks to restructure public external debt are progressing well. A debt restructuring agreement with commercial creditors, on terms comparable to those agreed with Paris Club creditors, is a crucial element in reestablishing a sustainable public debt outlook and supporting economic recovery.

Reestructuración A Tres Bandas

This case describes the situation of Icobandas S. A., a Colombian company founded in 1973, producer and seller of transporting and transmission bands. This company is well known for its excellent product quality and super technical assistance, gaining recognition and market share in the domestic and Latin America market. The firm was affected by several factors that in the 90's led the company to a crisis in which the only solution was a Corporate Restructuring agreement.For analysts, a Restructuring agreement (Law 550/99) does not necessarily mean the recovery of any organization if it is not combined with different management tools. The case asks the reader to conduct a comprehensive analysis (macroeconomic, financial, administrative, logistical, human capital, among others) to propose a strategy with three components leading to a solution that minimizes risk and benefits all stake holders.

Sovereign debt crises and credit to the private sector

We use micro-level data to analyze emerging markets' private sector access to international debt markets during sovereign debt crises. We find that these crises are systematically accompanied by a decline in foreign credit to domestic private firms, both during debt renegotiations and for over two years after restructuring agreements are reached. This decline is large, statistically significant, and robust. We find that this effect is concentrated in the non-financial sector and is different for firms in the exporting and in the non-exporting sectors. We also find that the magnitude of the effect depends on the type of debt restructuring agreement.

Sovereign Debt Crises and Credit to the Private Sector

Abstract We use micro-level data to analyze emerging markets' private sector access to international debt markets during sovereign debt crises. We find that these crises are systematically accompanied by a decline in foreign credit to domestic private firms, both during debt renegotiations and for over two years after restructuring agreements are reached. This decline is large, statistically significant, and robust. We find that this effect is concentrated in the non-financial sector and is different for firms in the exporting and in the non-exporting sectors. We also find that the magnitude of the effect depends on the type of debt restructuring agreement.

The EMF European Company Policy: the GME Restructuring and Framework Agreement

The EMF European Company Policy: the GME Restructuring and Framework Agreement

Analytics of Sovereign Debt Restructuring

Over the past few years there has been an active debate among policy-makers on appropriate mechanisms for restructuring sovereign debt, particularly international bonds. This paper develops a simple theoretical model to analyse the merits of these proposals. The analysis suggests that collective action clauses (CACs) can resolve the inefficiencies caused by intra-creditor coordination problems, provided that all parties have complete information about each other's preferences. In such a world, statutory mechanisms are unnecessary. This is no longer the case, however, when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors. In this case, the inefficiencies induced by strategic behaviour - the debtor-creditor bargaining problem - cannot be resolved by the parties themselves: removing these inefficiencies would require the intervention of a third party.

Analytics of sovereign debt restructuring

This paper develops a simple theoretical model to analyse recent proposals on restructuring of sovereign bonds. We find that collective action clauses (CACs) inserted in bonds resolve the inefficiencies caused by intra-creditor coordination problems providing that all parties have complete information about each other's preferences. In such a world, statutory mechanisms, such as international bankruptcy courts, are unnecessary. This is no longer the case when the benefits from reaching a restructuring agreement are private information to the debtor and its creditors due to inefficiencies caused by the debtor–creditor bargaining problem.

Strategisches Verhalten bei der Unternehmenssanierung durch außergerichtlichen Vergleich

Out-of-court negotiations are frequently used to restructure the debt of a financially distressed firm. This paper discusses out-of-court debt negotiations in a setting of asymmetric information. In the model, the debtor is better informed about his firm’s financial situation than the creditor. Thus, the debtor might try to understate his real financial situation in debt-renegotiations. If only the debtor offers the terms of the restructuring agreement, the creditor will be left in a position as if the firm was liquidated in a judicial bankruptcy procedure. However, the creditor’s share of the negotiation surplus rises if the creditor can commit himself to reject offers below a minimum offer or has the ability to screen the debtor by repeated offers. In this case, the debtor has incentives to offer liquidity to the creditor that would be unverifiable in a judicial bankruptcy procedure.

Resource Allocation and Contract Resolution in the Spanish Bankruptcy System

In this study we analyze the factors which, once a bankruptcy procedure begins in Spain, explain the results observed after the re-negotiation of the contracts between the debtor and the creditors. The multinomial logit model is used in order to specify the functional relationship between the financial characteristics of the firm and the outcomes observed in the bankruptcy system: a) restructuring; b) failed attempts to restructure which end in dismissal; and c) liquidations. The evidence (159 bankrupt firms have been included in the study) suggests that the processes of reassignment are not simply the result of chance, but rather that they result from a decision-making process where information which is contained in the financial statements is taken into account (the cases of liquidation reflect a greater deterioration in terms of historical trajectory of profits, measured by the reserves, as well as by a lesser capacity of the current generation of resources). Additionally, we connect to the corporate finance approach to contracts as a guide for analyzing the restructuring agreements agreed upon between the debtor and the non-privileged (also called ordinary) creditors. The results indicate that, the non-privileged creditors renounce a very significant part of the value of the debt and that there exists a positive relationship between the economic quality of the firm and the collection expectations by the creditors. Finally, the possibility that the creditors exercise ex post control over the managers is not foreseen.

Strategic Debt Restructuring

We analyze a distressed firm indebted to many creditors. The firm's owners have the option of choosing the sequence of restructuring negotiations with the creditors. We show that sequencing flexibility is beneficial to firm owners, and that the optimal sequencing of restructuring negotiations involves exploiting the firm's liabilities to some creditors so as to moderate the demands of others. Moderately distressed firms will eschew renegotiations with creditors in strong bargaining positions. Severely distressed firms will extract concessions from all creditors. In this case, owners can gain if they can credibly commit to conditional restructuring agreements that link the concessions of one creditor to concessions by others.

The Timing of Multilateral Lending

Bargaining over the terms of multilateral lending can be a prolonged process. We model failure to come to quick agreement as a screening device. Policy makers who find conditionality especially costly delay to signal their type. We show that increased costs to not reaching agreement, whether borne by borrowers or lenders, can increase the chances of delay. The IMF's high-profile involvement in recent crises in Asia and Russia illustrates the way international lenders and borrower governments delay to extract concessions. Loans from the Fund and other international lenders such as the World Bank and the United States Treasury are accompanied by detailed requirements for policy changes. Borrower countries bargain hard on the package of reform measures they are obliged to adopt and standoffs in negotiations are common. An example is the negotiations between the Fund and the Indonesian government beginning in autumn 1997. The Fund was critical of the Indonesian authorities' failure to carry out a series of detailed structural reforms and hostile to the Suharto government's expressed intention to introduce a currency board. As a banker commented, 'The more you talk about a currency board, the more you delay the debt restructuring agreement.' It was not until April 1998 that an agreement was reached. Indonesia gave up on the currency board and the IMF conceded that the government could continue subsidising food and energy. A problem with the use of strategic delay to extract concessions is that the backdrop to such negotiations is often a worsening economic situation. Postponing agreement can severely exacerbate the costs to both borrowers and lenders if it leads to high inflation, a loss of confidence in the banking system, political backlashes, or contagion. The recent confrontation between Indonesia and the Fund raised the prospect of a break off of negotiations. The Indonesian rupiah fell by 25%, the Jakarta stock market declined by 20%, prices skyrocketed and civil unrest worsened. In this paper, we use bargaining theory to analyse the timing of loan agreements between international lenders and governments in times of possible crises and rising costs of postponement. Our model works as follows. A country approaches international lenders for a loan. The lenders want as much reform as possible. They propose a programme yielding economic benefits to the country that requires some amount of reform as a condition. The country may accept the programme, in which case we suppose reform occurs. Or, it may reject the package, in which case the lenders may revise their proposal.

Private Bond Restructurings: Lessons for the Case of Sovereign Debtors

This paper reviews recent experience with both sovereign and private bond restructurings. It also summarizes the literature on private bond restructurings and describes the “typical” process for a voluntary exchange of new bonds for existing obligations. From this information some conclusions are drawn as to the possibility of concluding voluntary restructuring agreements for sovereign bonds within relatively short periods of time.

Bootstrapping options: An application to recapture clauses

We use bootstrapping to value the recapture clauses in three debt restructuring agreements. The bootstrapping values are between those of the Black, and the Black and Scholes formulas. The main benefit of using bootstrapping is less reliance on an arbitrarily chosen price process.

The 1990 Mexico and Venezuela recapture clauses: An application of average price options

The paper prices contingent contracts and options written on average prices and uses the methodology to value the recapture clauses in the 1990 Mexican and Venezuelan debt restructuring agreements. It is shown that the current values of the recapture clauses are less than one-quarter of the maximum contractually possible and are a concave function of the standard deviation of the oil price. The paper also points out that the benefits of recapture clauses are not only an increased degree of risksharing between countries and creditors, but also a decrease in the likelihood of the debtor to default and an increased incentive to invest and adjust.

Arbitration Clauses as Alternative Mechanisms for the Settlement of Conflicts Involving International Syndicate Loan Agreements and Restructuring Agreements

The aim of all debt restructuring programmes covered by the term menu approaches was the return of deeply indebted developing countries to the financial markets by means of a debt reduction policy substantially in conformity with market principles. At the same time, the provision of the new credits needed in order to finance the structural adjustment was to be ensured by a differentiation in the classes of creditors, as can be seen in the trend towards securitization of claims. However, the Mexico Agreement concluded at the beginning of February 1990 revealed the lack of interest of most commercial banks in supplying new credits. This was only to be expected, in view of the heavy losses of the commercial banks on credits to ailing Third World countries. Evidently, the creditor banks will only be willing to become involved in fresh money commitments if they are granted preferential payment from the foreign exchange earnings secured by the transactions or if they are offered a privileged position in the innovative arrangement of corporate finance products. This is the case, for example, in regard to participation in debt-equity programmes, debt-for-bond swaps or financing on the capital market.