Bankruptcy Guide

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<p>FIXED INCOME RESEARCHNOMURA INTERNATIONAL PLC</p> <p>Global Guide to Corporate BankruptcyA comprehensive guide to corporate bankruptcy and a survey of global corporate bankruptcy regimes</p> <p>21 July 2010Dominic OKane dominic.okane@nomura.com Patrick Bawlf +44 20 7102 2113 patrick.bawlf@nomura.comwww.nomura.com/research Bloomberg: NRE</p> <p>With the assistance of</p> <p>This!report!and! This report and the research upon which it is based have been commissioned from Quantitative Insights Limited by Nomura International plc. Please see important disclosures starting on page 160.</p> <p>Global Guide to Corporate Bankruptcy</p> <p>Acknowledgements and DisclaimerWe would like to thank Mike Guarnieri, Sean Kelly, Fabio Vassel, Andrew Riebe, Alison Miller, Herb Lust, Arthur Roulac, Toshihiro Uomoto and Matthew French at Nomura for their comments and assistance. We would also like to acknowledge Dominic Newcomb and James Chesterman of the law firm Latham &amp; Watkins for reading and commenting on this report, and for providing the resources of their firm to comment on the country sections. Their details are provided below. Dominic J. Newcomb LATHAM &amp; WATKINS 99 Bishopsgate London EC2M 3XF United Kingdom +44.20.7710.1191 dominic.newcomb@lw.com James Chesterman LATHAM &amp; WATKINS 99 Bishopsgate London EC2M 3XF United Kingdom +44.20.7710.1004 james.chesterman@lw.com</p> <p>We would also like to thank the law firms Mason Hayes+Curran, Koutalidis, Rajan &amp; Tann LLP and Herbert Geer (together with Latham and Watkins, the Contributors) for their comments on the Ireland, Greece, Singapore and Australian sections respectively. Their contact details are provided at the end of the corresponding country sections. This publication has been prepared by Nomura with the assistance of the Contributors for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship with Nomura or any of the Contributors. Readers should not act upon any statement contained in this publication without seeking advice from professional advisers.</p> <p>Credit Insights</p> <p>2</p> <p>21 July 2010</p> <p>Global Guide to Corporate Bankruptcy</p> <p>Highlights!" Global credit markets have changed markedly in recent years as new products, new structures, new investors, new regulations and new documentation have altered the way in which large companies finance themselves. !" As a result, the nature and complexity of corporate bankruptcy has changed, especially with respect to corporate rehabilitation, as more parties with different forms of debt and differing motivations are now at the negotiating table. !" The increased internationalisation of credit portfolios caused to a large extent by the advent of the European single currency, the disintermediation of banks, and a desire for diversification have required credit investors to better understand the treatment of bankruptcy across a broader range of jurisdictions. !" This report has therefore been written with the aim of providing credit investors with a clear explanation of how bankruptcy procedures work within many of the major jurisdictions across North America, Europe and Asia. !" This report is in two parts. Part one begins by setting out the different forms of corporate debt which exist and the factors, including security, payment and structural subordination, which determine recovery. !" Part two provides a detailed description of the insolvency regimes found in the major and some of the other frequently encountered insolvency regimes. We cover the United States, Canada, England and Wales, France, Germany, Italy, Spain, Ireland, Greece, Japan, Hong Kong, Singapore and Australia. !" We explain how debtor or creditor-friendly each regime is, how the respective rights of secured and unsecured creditors are treated, what the priority of payments is in liquidation and what formal procedures are provided to facilitate the reaching of a binding restructuring agreement. !" In each country we set out at least one case study in order to highlight specific aspects of each jurisdictions insolvency framework and to give a sense of the time taken by the procedures. !" We note that many countries have revised their bankruptcy regimes in the past decade with the aim of encouraging company rehabilitation as an alternative to liquidation. !" We perform a country-by-country comparison of liquidation and rehabilitation procedures, highlighting the important features of each regime.</p> <p>Credit Insights</p> <p>3</p> <p>21 July 2010</p> <p>Global Guide to Corporate Bankruptcy</p> <p>Credit Insights</p> <p>4</p> <p>21 July 2010</p> <p>Global Guide to Corporate Bankruptcy</p> <p>Contents1 Introduction .................................................................................................................................. 6 2 The Bankruptcy Process ............................................................................................................. 9 2.1 The generic insolvency procedure ..................................................................................... 11 3 A Survey of Corporate Debt ...................................................................................................... 17 3.1 Bonds .................................................................................................................................... 19 3.2 Loans ..................................................................................................................................... 21 4 Events of Default ........................................................................................................................ 27 4.1 Incurrence covenants .......................................................................................................... 28 4.2 Maintenance covenants ....................................................................................................... 29 4.3 The covenant breach process ............................................................................................. 30 5 Determining the Recovery Rate ................................................................................................ 33 5.1 Security ................................................................................................................................. 35 5.2 Subordination ....................................................................................................................... 36 6 Evaluating a Bankruptcy Regime ............................................................................................. 41 7 Survey of Bankruptcy Regimes ................................................................................................ 43 7.1 The legal traditions for bankruptcy law ............................................................................. 43 7.2 UNCITRAL and cross-border insolvency ........................................................................... 44 8 North America ............................................................................................................................ 45 8.1 United States ........................................................................................................................ 45 8.2 Canada .................................................................................................................................. 53 9 Europe......................................................................................................................................... 59 9.1 England and Wales (UK) ...................................................................................................... 59 9.2 Germany ................................................................................................................................ 67 9.3 France.................................................................................................................................... 74 9.4 Italy ........................................................................................................................................ 81 9.5 Spain...................................................................................................................................... 90 9.6 Greece ................................................................................................................................... 97 9.7 Ireland.................................................................................................................................. 103 9.8 EU Insolvency regulations ................................................................................................ 109 10 Asia ......................................................................................................................................... 114 10.1 Japan ................................................................................................................................. 114 10.2 Hong Kong ........................................................................................................................ 122 10.3 Singapore .......................................................................................................................... 130 10.4 Australia ............................................................................................................................ 137 11 A Country Comparison .......................................................................................................... 146 11.1 Liquidation procedures ................................................................................................... 146 11.2 Rehabilitation procedures ............................................................................................... 148 12 Conclusions ........................................................................................................................... 152 13 Glossary.................................................................................................................................. 154</p> <p>Credit Insights</p> <p>5</p> <p>21 July 2010</p> <p>Global Guide to Corporate Bankruptcy</p> <p>1 INTRODUCTIONThe considerable changes in the credit markets in recent years have transformed the nature of corporate bankruptcy Credit investors now need an understanding of bankruptcy across a range of jurisdictions</p> <p>Global credit markets have changed markedly in recent years. With increased disintermediation have come new products, new structures, new investors, new documentation, and new regulations which have significantly changed the way in which large companies finance themselves. As a result, the nature of corporate bankruptcy has been transformed. Furthermore, the increase in internationalisation of debt has required credit investors to better understand the treatment of bankruptcy across a broader range of jurisdictions. This report has therefore been written with the aim of providing credit investors with a clear explanation of the main features of corporate bankruptcy within many of the major jurisdictions across North America, Europe and Asia. In order to explain bankruptcy, we need to set out in detail the factors that determine the recovery rate of defaulted debt. Many of these factors are set out in the contractual documents of bonds and loans. These include covenants, the creation of security, contractual subordination and structural subordination. However, much of what happens in bankruptcy also depends on the bankruptcy regimes of the countries in which the bankruptcy proceedings are conducted. Indeed, when it comes to bankruptcy it is usually the letter of the law in this jurisdiction that determines the negotiating positions of the parties and the final outcome. The need for a report that covers multiple jurisdictions is largely driven by two observations. First, many of the large companies that issue debt are multinationals and so their creditors have exposure to the local bankruptcy regimes of the subsidiary operating companies which may be spread across a range of jurisdictions. Second, credit funds seeking to diversify their risks now own debt from companies across a broader range of jurisdictions than previously. This fact is nowhere more important than in Europe, where the advent of the euro has made it easier for companies across the eurozone to fund themselves via both the capital markets and the loan markets. However, although the members of the eurozone share the same currency, their bankruptcy regimes can differ significantly. Investors holding this debt need to appreciate how a bankruptcy regime can have a material impact on the expected recovery rate of a bond or loan. This report is divided into two parts. Part one is an introduction to corporate default. This consists of a detailed description of the generic bankruptcy process, a survey of the various forms of corporate debt, a description of the mechanics of how a company ends up in a state of insolvency, a description of the various forms of subordination and a discussion of the use of security. Part two of this report is a detailed survey of the treatment of financially distressed companies, and their creditors, across several of the major and some of the minor bankruptcy jurisdictions around the world. Part one of this report begins in section 2, where we introduce the reader to bankruptcy as a process. We do this by setting out the key stages of what we call the generic bankruptcy procedure. We explain how companies enter such a procedure, what the main stages are, and how the procedure results in either corporate rehabilitation or liquidation. The aim of this section is to raise awareness of which features of a bankruptcy process encourage successful rehabilitation, how the legal details of the procedure can determine the balance of power between the interests of the debtor, shareholder and creditor, and how the differing rights of secured and unsecured creditors are treated. This discussion provides a useful reference point against which the many country-specific procedures described in part two of this report can be compared. In section 3 we survey the many types of debt that a company may assume. We start with publicly issued bonds, both investment grade and high yield. We then survey the many forms of loan-based debt. These include syndicated investment grade loans, leveraged loans and mezzanine finance. The more recent phenomenon of covenant-lite leveraged loans are also described. It is essential to know the main characteristics of these forms of debt in order to understand how they are affected by bankruptcy. In section 3 we survey the different types of creditor. These consist not just of banks but also private equity shops, hedge funds, distressed debt funds and CLO funds. It is important to understand who these investors are, and what are their motivations and constraints, if we are to understand th...</p>

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