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Home›Moldova loans›bne IntelliNews – Pandemic support withdrawal could create ‘perfect storm’ for business distress

bne IntelliNews – Pandemic support withdrawal could create ‘perfect storm’ for business distress

By George Taylor
February 3, 2022
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Grim predictions of a huge rise in bankruptcies during the pandemic have yet to materialize in emerging Europe, but experts in a webinar marking the launch of the new report from the European Bank for Reconstruction and Development (EBRD ) on business reorganization warned that the phasing out of pandemic support measures could still create a “perfect storm” for business distress.

In a context of unprecedented difficult conditions for companies in all sectors, the authors of the ‘EBRD Business Reorganization Evaluation Report‘ and other panelists highlighted the importance of having procedures in place for businesses that run into difficulties.

“Strong policy frameworks that support businesses as well as banks and investors are absolutely vital for a thriving market economy,” said EBRD President Odile Renaud-Basso.

“The economic crisis has taught us that insolvency is not only about the liquidation of failing companies. We need to do everything we can to remove the stigma around insolvency, recognize that all businesses can run into trouble at some point, and that most businesses deserve a chance for a fresh start,” added Renaud-Basso.

“One of the things that makes a country investor-friendly is a common understanding of what happens when a business gets into trouble. Helping countries build strong insolvency systems that provide effective options for reorganization is crucial to the business of banks. Countries with systems in place are also better placed to weather the storms and recover from a financial crisis,” said Ramit Nagpal, Deputy General Counsel at the EBRD.

Worse to come?

So far, there has been no increase in non-performing loans (NPLs) and bankruptcies in the EBRD’s countries of operations, said the bank’s chief economist, Beata Javorcik. In fact, she cited Eurostat data showing that the number of bankruptcies in the new EU member states in 2021 and 2020 was lower than in the pre-pandemic period.

However, she added, “this is not surprising given that many governments are introducing emergency measures to protect businesses from insolvency”. – but of course the measures are going to be withdrawn and we will probably see NPLs and companies that will need to be restructured.

Mahesh Uttamchandani, Global Head of Financial Inclusion and Infrastructure at the World Bank Group, also noted the $10 trillion global stimulus and pointed out that in previous crises there was a lag between the peak of the crisis and the spike in insolvencies and NPLs that followed it. After the global financial crisis, this lag was around 13 quarters for advanced economies and 11 quarters for emerging markets.

“According to this metric, we may still feel the aftermath of the crisis in a few quarters, and we may see [a] increase in the number of cases [of restructuring and NPLs]“said Uttamchandani. Globally, around 155 countries have embarked on some sort of reform related to insolvency and debt repayment in 2020, and around 80% of these countries have measures in place to delay loan payments. overdue or limit the ability of creditors to initiate insolvency proceedings. “As these metrics begin to fade, we may end up with a pent-up stock of loans that are not officially non-performing, but are in trouble or under-performing or on the verge of becoming non-performing” , he warned.

“In Europe, among the existing stock of NPLs entering the pandemic, there has been a decrease in the performance of the assets of these loans. There is one aspect of asset degradation that we need to keep an eye on which, coupled with the withdrawal of economic support and legal forbearance, could produce the perfect storm of distress.

Additionally, in an update on the economic situation in the region, Javorcik noted that while most of the EBRD’s countries of operations “performed quite well last year… are now piling up on the horizon. She cited low vaccination rates in the region, rising inflation and slowing growth in Western Europe, which “does not bode well for exports” as risk factors.

Great performances

The Business Reorganization Assessment Report launched on February 1 ranks economies based on the support of their legal bailout framework. Unsurprisingly, the top performers were four EU member states: Greece, Poland, Lithuania and Romania.

“EU member states have been under-incentivized to look into this area as they have had to transpose the preventive restructuring directive introduced in 2019 to support business reorganization,” explained Catherine Bridge Zoller, senior adviser at the BERD and one of the authors of the report, presenting the results.

Among the other states in the region, Kosovo, the newest state in emerging Europe, ranks fifth, followed not far behind by Moldova and Albania. “Kosovo, Albania and Moldova have in our opinion quite progressive legislation, the most progressive we could identify outside the EU,” Zoller said. Regarding Kosovo, the highest ranked country outside the EU, she commented: “Kosovo has a very good, solid legal framework, the legislation is comprehensive and Kosovo is also quite exemplary in that it has a tailor-made procedure for SMEs, but the country scores very poorly on transparency.

All economies in which the EBRD invests have a legal framework for the reorganization of distressed businesses. However, there were also wide variations in the treatment of insolvency by different countries. “In some countries the process is very simple and linear like Tajikistan and Mongolia. Others like Poland and Uzbekistan have four or five procedures,” Zoller said.

The research was launched at the start of the coronavirus crisis in 2020 and is based on a survey of 500 experts, including lawyers, bankers and accountants.

Policy recommendations

Some of the specific problems identified in the research included the lack of hybrid reorganization procedures and the fact that voluntary restructurings or restructurings are rare in many economies. There is also a stigma surrounding bankruptcy proceedings.

The report urges national governments to provide longer-term solutions for business rescue, including increasing flexibility in business reorganization and supporting hybrid procedures, where the terms of reorganization are negotiated out of court, according to an EBRD press release.

One of the problems compensated was the lack of information in many of the states in the EBRD’s region of operations. “Data transparency is really important for more informed policy-making. Without this, [it is] difficult to say what effect a legislative amendment or new law has on the business sector and in promoting market confidence,” Zoller noted.

Among the countries studied, 11 obtained 0 points on transparency. At the other extreme, six scored 10 out of 10, after taking steps such as investing in an electronic insolvency register.

Commenting on the steps the EBRD would like to see, Zoller first listed transparency which, she said, “will help authors and national regulators better understand insolvency systems, and where the leak is.” value, what are the recoveries”.

Emphasis should also be placed on the speed of insolvency proceedings, she added: “It is value-destroying to go through very long insolvency proceedings. It should be a quick round trip.

Finally, she said, “it is also important to invest in capacity building, as insolvency is a specialist area. You need business-savvy commercial judges and a thriving profession of insolvency practitioners to work on reorganization plans and advise corporate debtors. You have to think carefully about the whole ecosystem.

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