Vol 3 (2006) - Issue 6

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The Distressed Debt Market: Where Are We Heading?

Background
Upon reviewing trends in domestic insolvency law regimes
around the world, one point is strikingly clear: many insolvency laws have recently been amended or are currently under review. The main reason: a political reaction to addressing, for the interests of various parties,the financial and economic cycles that give rise to some unforgettable crises (e.g. the Asian crisis of 1997 and Argentina’s external debt default in 2001 and its banking crisis in 2002). It is also a response to a global impetus focused on avoiding liquidation of troubled companies as well as to the adoption of UNCITRAL’s cross border insolvency Model Law.
As stated by Stone, corporate restructuring on a large scale is usually made necessary by a systemic financial crisis.1 This is defined as a severe disruption of financial markets that, by impairing their ability to function, has large and adverse effects on the economy. The episodes of Enron, Parmalat, Yukos and Worldcom are helpful to remind us that developed countries are no strangers to the need of restructuring, although restructuring is more frequent in developing states. What are some of the key characteristics of recent legislation?
Time is money: the ‘expedited’ insolvency laws
Since corporations doing business in countries undergoing crises are not exempt from the turmoil, it can be argued that recently amended insolvency laws are aiming for expedited debt restructuring procedures. Clear examples are the recently amended laws of Argentina (2002), Turkey (2004) and Brazil (2005), all of which included or streamlined an expedited debt restructuring procedure similar to the US Chapter 11 pre-packaged deals or pre-negotiated plans. The difference between the pre-packaged deals and pre-negotiated plans is the moment of solicitation of the creditor’s consents. As clearly stated by Jacoby,2 the difference lies in whether it is ‘pre-voted’ or ‘post-voted’, assessed as of the moment that a court approval (homologation) is requested by the debtor. The key element of these expedited mechanisms
is that by giving limited intervention to the court, the debtor has the chance to ‘cramdown’ the dissenting minorities, thereby solving the ever-feared problem of the holdout creditors.
The intervention of the court is limited in the sense that its role would be limited to: (1) ensure that certain principles (equity, fairness, etc.) have not been violated
by the debtor and that the required restructuring threshold has been achieved; and, (2) to homologate the approved plan/agreement making it mandatory to the dissenting minority. If we are facing a pre-negotiated plan, the court will also have to summon creditors to vote the plan under the auspices of the court. However, it is worth noting that the debtor would not request the court’s approval if it has not yet – as its name indicates – pre-negotiated the creditor’s consent. It should be borne in mind that there are some countries where such proceedings do not even involve a court and where the overseeing authority is an administrative entity (e.g. Peru or Bolivia).