## posrfea ## Source details **Canonical URL:** [posrfea](https://www.imf.org/-/media/files/publications/dp/2022/english/posrfea.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2022/english/posrfea.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2022/english/posrfea.pdf.json) --- ### Executive Summary — Overview, Market Failures, and Policy Principles - Impact and concern: - COVID-19 led to unprecedented enterprise-sector policy measures that "helped avoid a wave of insolvencies" temporarily but left risks of corporate debt overhang and zombification if untargeted support is prolonged and of a wave of insolvencies if support is removed abruptly. - The paper presents principles to guide targeted policy support and to facilitate restructuring of firms adversely impacted by COVID-19. - A new crisis-preparedness indicator assesses countries’ readiness across five dimensions: out-of-court restructuring, hybrid restructuring, reorganization, liquidation, and the institutional framework. - Vulnerabilities are more pronounced where crisis preparedness is weak; such jurisdictions need to strengthen insolvency systems. - Key market failures (asymmetric information and network externalities): - Asymmetric information: - Imperfect and uneven understanding of firm prospects, legal/backlog constraints, and future policy undermines private financing and investment; can cause under-provision of bridge financing and excessive liquidations of viable firms. - Network externalities: - Firm bankruptcy can have major spillovers to suppliers and consumers; private creditors considering only private firm value may close viable firms with temporarily weak balance sheets. - Mass insolvencies reduce reorganization opportunities, prolong liquidations, destroy value, lower creditor recoveries, and can amplify bank-sovereign-corporate linkages. - Policy strategy principles (country-differentiated): - Design support schemes with clear objectives targeting identified market failures. - Embed strong governance, transparency, and ex ante exit plans; promote burden sharing and active public creditor participation. - Where fiscal space is depleted or insolvency systems ineffective: rely more on out-of-court and hybrid restructuring and pursue medium-term legal/institutional reforms. - Countries with fiscal room have more options (continued support, equity injections) but must guard against zombification and moral hazard. - Priorities by country group: - Advanced economies: simplify liquidation procedures; improve reorganization technicalities (including for small firms); increase out-of-court use; continue digitalization; make legal environment more conducive to restructuring. - Emerging market economies: strengthen courts and regulation of insolvency administrators; introduce/improve hybrid restructuring. - Low-income countries: improve out-of-court and hybrid restructuring to boost crisis preparedness while broad reforms proceed. - Lender resilience: maintain sound balance sheets; contingency planning may reactivate past tools; any AMC use depends on design and governance. ### Operational emphases and sequencing - Shift from untargeted emergency freeze measures to targeted policies that: - Shift to solvency support for viable firms and debt relief. - Support structural transformation and asset redeployment. - Support lenders managing risk and capital pressures. - Use a mix of approaches to address case backlogs: - Out-of-court and hybrid approaches to reduce pressure and provide quicker negotiated solutions. - Court-based reorganization and liquidation where appropriate, with reforms to improve speed and effectiveness. - Policy design features: clear objectives, strong governance, transparency, ex ante exit plans, and public creditor participation with burden sharing where feasible. ### Corporate Sector Vulnerabilities — Key Findings - Market movements and policy responses: - Global asset prices saw a sharp correction; in emerging market economies corporate and sovereign spreads "more than doubled, on average". - Policymakers prioritized speed and liquidity relief, mitigating immediate insolvency risk but contributing to debt build-up. - Corporate and sovereign spreads in the median emerging market economy returned to January 2020 levels by November 2020; advanced economies recovered sooner. - Since the COVID-19 shock, "more than a third" of the rise in nonfinancial firms’ debt-to-GDP ratio is attributed to increased borrowing; the remainder from GDP decline. - Inspections: insolvencies declined in many jurisdictions in 2020 (Allianz Research 2021 reports insolvency cases in selected economies decreased by "12 percent" in 2020), creating a "COVID-19 bankruptcy gap" and potential court backlogs when support is withdrawn. - Corporate vulnerability measurement (summary score details preserved): - Firm-level metrics aggregated to country medians and expressed on a "1-to-10" scale: return on assets (percent), leverage ratio (percent), interest coverage ratio, cash ratio (percent), debt at risk (percent), firms at risk (percent). - Country-level addition: share of investment grade (IG) firms (from CRI PDs). - Summary score: simple average of percentiles within country income groups; risk classification: below "33rd percentile" (low), "33rd and 66th percentile" (medium), above "66th percentile" (high). For return on assets, cash ratio, and share of IG firms the scale is reversed. ### Crisis-preparedness indicator — framework and results - Indicator purpose: measure ability of insolvency systems to handle large-scale corporate insolvencies by assessing tools and institutions useful in systemic crises. - Coverage and scoring: - Covers 60 countries representing "91 percent" of world GDP and "84 percent" of the global population; legal/institutional status assessed by "July 1, 2021". - Composite maximum score "100" composed of five equally weighted sub-indicators (each weight "20"): Enhancements to out-of-court restructuring; Hybrid restructuring; Reorganization; Liquidation; Institutional framework. - Elements graded on ROSC 4-grade scale: "0–25"; "25–50"; "50–75"; "75–100". - Cross-country patterns: - Many emerging market and low-income countries with larger corporate vulnerabilities also show weaknesses in insolvency resolution. - NPL shares relate inversely to crisis-preparedness scores; weak frameworks undermine timely and cost-effective NPL resolution. - Selected quantitative scores (Annex Table 3.1 highlights): - Highest totals: Korea "84.0"; United Arab Emirates "81.5"; United Kingdom "79.0"; Germany "76.3"; France "75.1". - Several jurisdictions show "0.0" in Hybrid Restructuring (examples include Cambodia, Haiti, Honduras, Iran, Jordan, Nicaragua, Tajikistan, Turkey, Venezuela, Vietnam). - Country-component examples preserved (Argentina Total "49.1"; Canada Total "72.5"; Japan Total "71.5"; United States Total "57.0"; Mexico Total "41.1"). ### Policy priorities by country group (summary) - Advanced economies: refine reorganization rules, expand simplified procedures for small firms, simplify liquidation, increase out-of-court use, continue tech adoption. - Emerging markets: strengthen courts, insolvency administration, introduce hybrid techniques, improve liquidation and reorganization frameworks. - Low-income countries: prioritize out-of-court and hybrid restructuring while undertaking broad legal and institutional reforms. ### Moving to Targeted Support — Rationale and Policy Options - Rationale for targeting: - Untargeted support risks zombification and exhausts policy space; zombies are less productive, depress investment and employment at productive firms, and stifle entry. - Choice between targeted support and restructuring depends on whether difficulties are temporary (support) or reflect business-model weaknesses (restructuring); viability assessments are uncertain. - Policy options by fiscal space and insolvency capacity: - With fiscal space and effective insolvency systems: options include continued liquidity support, direct equity injections, or market-driven debt restructuring; enable out-of-court and hybrid restructuring; expand insolvency capacity if needed. - With depleted fiscal space or weak insolvency systems: may need to discontinue broad support, enable out-of-court workouts, introduce legal/institutional reforms to avoid disorderly restructurings. - Trade-offs: public equity increases fiscal risk and moral hazard; poorly targeted support prolongs misallocation and hampers private restructuring; withdrawal raises financial stability risk. - Financial sector considerations: - Elevated pre-existing NPLs require urgent supervision, insolvency system strengthening, and distressed-debt market development. - Resolving NPLs stimulates new lending demand and facilitates viable-firm restructurings. - AMCs can catalyze impaired loan resolution and support distressed-debt markets, subject to design and governance. - Insolvency/resolution modalities and triage: - Triage framework divides firms into: not viable → liquidation; distressed but viable → restructuring (financial and/or operational); distressed but will recover without restructuring/support. - Choice of mechanism summarized in Table 1 (preserved logic): - Viable + financial restructuring + unanimous/broad creditor agreement → informal/enhanced out-of-court. - Viable + financial restructuring + majority agreement to bind holdouts → hybrid restructuring. - Viable + financial and operational restructuring + majority binding → judicial reorganization. - Nonviable → liquidation (reallocate assets). - Complementary structural measures: - COVID-19 accelerates structural change; promoting corporate restructuring frees resources for new growth. - Complementary policies (labor, product-market, regulatory, green/digital transition) support reallocation. - Policies to "steepen the start-up curve" can complement efforts to "flatten the insolvency curve" (examples cited: France €4 billion start-up fund; Germany tailored start-up aid; UK co-financing fund). ### Lessons from past crises and sequencing implications - Past crises (Tequila, Asian financial crisis, GFC) show: - Need for strong banking supervision, enforcement capacity, effective insolvency systems, and well-designed state involvement. - Out-of-court restructuring has often been effective where insolvency systems were weak. - Peaks in insolvency can produce court backlogs and excess liquidations; hybrid approaches (pre-packs, preventive procedures) became important, especially for SMEs in Europe. - Current crisis differences: - Many firms were viable pre-crisis; financial-sector impacts may manifest later. - State has become a major creditor via explicit/implicit claims, complicating exit and restructuring sequencing. - Improved insolvency regimes in many countries expand feasible solutions relative to past crises. ### Solvency Support — Allocation, Instruments, Safeguards, and Lessons - Allocation principles: - Target solvency support toward viable firms lacking reasonable private financing access. - Viability determination: compare liquidation value with net present value of future cash-flows; recognize heightened structural uncertainty. - Practicalities: creditor-driven assessments with third-party specialists; transparent, risk-based allocation; prioritize viable firms with significant employment or essential activities when resources limited. - Exclude firms already distressed pre-COVID-19 from solvency support; redirect them to restructuring. - Forms of policy support: 1. Equity and equity-like instruments: - Non-voting preferred shares, convertible bonds, profit participation constructs; hybrid instruments for unincorporated micro/SMEs (subordinated loans, profit participation loans), and grants for micro-firms. - Incorporated SMEs: subordinated debt, non-voting preferred shares, contingent convertibles; public sector may take profit participation without managerial control. - Large firms: government equity considered when markets or private investors cannot provide needed capital. 2. Other instruments: - Conditional/unconditional debt relief, loan forgiveness, cancellation of tax/social liabilities; indirect solvency support via tax relief for intermediaries, public-private investment, guarantees, risk transfer. - Policy options include reducing tax advantage of debt (examples: Italy, Turkey) and incentives for debt-to-equity conversions. - Safeguards: - Transparent selection criteria; limited to firms distressed due to the pandemic; time-limited; include clear exit strategy; mitigate debt-overhang and financial-stability implications. - Conditional subsidies should require lender and borrower contributions to promote burden sharing and reduce taxpayer cost. - Lessons from past episodes: - Strategic bailouts entail large fiscal impacts and medium-term risks (example: U.S. auto sector ~"$81 billion" in loans and equity investments). - Unconditional debt relief generally avoided (except limited micro-firm grants) due to moral hazard and fiscal cost. - Conditional debt relief and burden sharing are more effective (Mexico’s Punto Final Program: beneficiaries included "800,000" farms, "212,000" SMEs, "456,000" mortgage loan holders; estimated cost "3.3 percent of GDP"; discount and bank/government sharing schedule preserved). - Design of conditional programs requires credible supervisory authority, effective insolvency systems, and coordination across agencies. ### Promoting Corporate Restructuring — Out-of-Court, Hybrid, and Court-Based Measures - Objective: increase capacity, "flatten the insolvency curve," and reduce court caseload via alternatives to full formal insolvency. - Out-of-court restructuring: - Scalable, cost-efficient, negotiation-based among debtors and creditors without court involvement; can be enhanced via guidelines/codes of conduct, master restructuring agreements, administrative schemes, incentives/disincentives, and state administrative support. - INSOL Principles for Multi-Creditor Workouts outline eight best-practice principles emphasizing standstills, information sharing, creditor coordination, representative committees, confidentiality, and priority for rescue financing. - SME-focused features: voluntary codes, standardized restructuring, state advisory services, simplified procedures. - Hybrid restructuring: - Limited judicial intervention to prevent enforcement and bind holdouts; features include stays, pre-packaged reorganizations, and preventive procedures combining out-of-court negotiation with court confirmation. - Pre-pack advantages: rapid confirmation and shorter duration (U.S. ordinary reorganization average "504 days" vs. pre-pack "77 days" for 2011–18; one pre-pack lasted "16 hours"). - Pre-insolvency procedures widely used in Europe and some Latin American countries. - Lessons and examples: - Korea CRCC/CRPA and Turkey master restructuring agreement show structured creditor committees, deadlines (e.g., Turkey fixed negotiation term "90 days"), majority decision rules, arbitration mechanisms, and incentives for fresh funding. - Malaysia’s CDRC: standstill, viability assessment, 60-day proposal period, "75 percent" majority rules, new-money senior ranking. - Design drivers: credible threat of insolvency, administrative/state endorsement, restructuring experts, ADR mechanisms, penalties/incentives for compliance, and incentives for new-money provision. - Role of formal insolvency: - Formal reorganization remains necessary for operational restructuring; reorganization features to emphasize: debtor-in-possession, comprehensive stay, treatment of executory contracts, rules for post-petition finance, class formation and cram-down, and simplified procedures for micro/small enterprises. ### Building More Effective Insolvency Regimes — Reorganization, Liquidation, and Institutions - Reorganization (key desirable features): - Debtor-in-possession to incentivize early action. - Stay of creditor actions to preserve going-concern value while protecting secured creditor rights. - Effective rules for executory contracts: maintain essential contracts and disclaim loss-generating ones. - Post-petition (DIP) finance rules to facilitate new funding with prioritized claims and safeguards. - Mechanisms for plan approval: class voting and cram-down with creditor protections. - Simplified, lower-cost procedures for micro and small enterprises. - Where government is a major creditor, active participation and possible higher haircuts ("premium for continuation") by the state may be warranted, subject to complications from priority of tax/social claims. - Liquidation (efficiency reforms): - Liquidations should be fast and procedurally simple with a supervisory court role and empowered liquidator. - Law should allow sale of business as a going concern before piecemeal sales; short stay on secured creditors may be needed. - Sale of collateral should be flexible and timely; use digital platforms and e-auction systems to increase transparency and recovery values. - In crises, prioritizing quick restructurings and reorganizations over accelerated liquidations is emphasized, since delayed liquidations increase damage. - Institutional framework enhancements: - Specialization of judges or commercial courts; flexibility to expand judicial capacity temporarily. - Use of technology: electronic case management, e-filing, virtual hearings, remote creditor voting. - Regulation of insolvency professionals and support professions (lawyers, accountants, appraisers) including entry requirements, conduct rules, supervision, and sanctioning. - Investment in insolvency data collection and analysis to track performance and guide reforms. ### Indicator for Crisis — Technical Design Highlights - Composite indicator maximum "100" with five equally weighted sub-indicators ("20" each). - Sub-indicator composition (selected numeric weightings preserved): - Sub-indicator 1 (Out-of-Court): core framework elements jointly produce "55 percent" of sub-indicator with maxima for specific elements (guidelines up to "30 percent"; master agreements up to "45 percent"; administrative schemes up to "50 percent"); auxiliary elements comprise the remaining "45 percent" with stated point shares (for example, functional debt enforcement "6 percent"). - Sub-indicator 2 (Hybrid): pre-pack may reach up to "75 percent" of sub-indicator ("15 points"); stays "25 percent" ("5 points"); pre-insolvency procedures up to "90 percent" ("18 points"). - Sub-indicator 3 (Reorganization): six equally weighted elements ("1/6" each) covering debtor-in-possession, stay, executory contracts, post-petition finance, plan approval safeguards, and simplified SME reorganization. - Sub-indicator 4 (Liquidation): four elements each "25 percent" covering procedural simplicity, sale as going concern, collateral sale, and technology/flexibility. - Sub-indicator 5 (Institutional framework): elements weighted (courts "30 percent"; second element "25 percent"; third "25 percent"; support professionals "20 percent"); includes court specialization, court technology, regulation of insolvency profession, and regulated support professionals. - Operational threshold note: historical patterns indicate an annual increase of "200 percent" or more in insolvency cases tends to create severe systemic issues. ### Asset Management Companies (AMCs) — Lessons from Case Studies (selected figures preserved) - Korea (KAMCO, 1997): - Acquisitions: total loans acquired KRW"110.1 trillion"; NPLs KRW"39.8 trillion" (14.7 percent of bank loans). - Transfer prices averaged a "64% discount" from face value. - Outcome: resolved KRW"64.6 trillion" of NPLs (~"60 percent" of acquisitions) and recovered KRW"30.3 trillion" (~"76 percent" of amount spent). - Mexico (FOBAPROA, 1994/late-1990s): - Outcomes: DAC recovered US$"16 billion" assets (28,000 loans); by 2003 only "0.5 percent" of transferred assets had been sold with average asset recovery "15 percent". - Result: private credit as share of GDP fell from "39 percent" end-1994 to "19 percent" end-1998 and to "11 percent" end-2001. - Malaysia (Danaharta, 1998): - Features: statutory vesting, foreclosure powers without court, purchase at discounts, profit-sharing with selling banks (80 percent bank / 20 percent Danaharta), government-guaranteed zero-coupon bonds as payment. - Outcome: primary acquisition completed by June 1999 "six months ahead of schedule"; statutory powers accelerated recovery. - Indonesia (IBRA) and Slovenia (BAMC) cases illustrate mixed outcomes dependent on transfer valuation, judicial/enforcement capacity, asset types, and governance; Slovenia purchased assets face value €"5.8 billion" for €"2.0 billion" and extended AMC lifetime to complete disposals. ### Conclusion — Strategy Pillars and Sequencing - Objectives: avoid zombification, address corporate debt overhang, and ensure a sustainable corporate sector post-COVID-19. - Core elements of strategy: - Targeted support with clear objectives and safeguards. - Legal reforms enabling out-of-court, hybrid, reorganization, and liquidation tools. - Cross-agency collaboration for corporate distress data (commercial registries, tax authorities, financial sector). - Direct additional support to viable firms without market access; ensure active public creditor participation and burden sharing. - Prioritize reforms by country group and start medium-term legal/institutional reforms immediately while developing quicker out-of-court/hybrid options. - Contingency planning for lender balance-sheet resilience; AMC use contingent on robust design and governance. *Source: IMF Departmental Paper — Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis (Executive Summary and selected chapters, annexes, and tables).* ### Executive Summary ................................................................................................v ### Executive Summary ### Overview: impact and main concern - The COVID-19 pandemic significantly impacted the enterprise sector. Unprecedented policy measures helped avoid a wave of insolvencies, at least temporarily. But risks remain of corporate debt overhang and zombification of firms if untargeted support is prolonged and of a wave of insolvencies if support is removed abruptly. - The paper presents principles to guide the design of more targeted policy support and to facilitate restructuring of firms adversely impacted by the COVID-19 pandemic. - The paper takes stock of vulnerabilities and risks in the enterprise sector and assesses countries’ preparedness to handle a large-scale restructuring of businesses using a newly designed indicator of crisis preparedness that includes five dimensions (out-of-court restructuring, hybrid restructuring, reorganization, liquidation, and the institutional framework). - Vulnerabilities tend to be more pronounced in jurisdictions with shortcomings in crisis preparedness, and those countries need to step up efforts to improve their insolvency systems. ### Key market failures (Box 1) - Asymmetric information: - Creditors and borrowers have an imperfect and uneven understanding of the state of the economy, prospects of individual businesses, implications from overburdened judicial systems, and future public policy decisions. - High economic uncertainty and increased opacity in assessing credit risk and future viability worsen information problems, leading to under-provision of financing (through equity or debt) and lower investment in absence of government intervention—especially when undermined by difficulties in determining future viability. - This could lead also to inadequate bridge financing during private debt restructurings, which could cause excessive liquidations of viable firms. - Network externalities: - Network effects in a fragile and depressed economy tend to be strong as the bankruptcy of a firm may have major effects on its suppliers and their consumers. - By considering only the private value of the firm, private creditors would close too many firms that are viable but have temporarily weak balance sheets. - A wave of insolvencies results also in reduced opportunities for the reorganization of viable companies and an increase in liquidation cases. This, in turn, prolongs liquidations, fuels the destruction of value, and reduces recovery values for creditors. - The bank-sovereign-corporate nexus can amplify the effects of mass insolvencies on economic growth and financial stability. ### Policy strategy principles and country-differentiated guidance - First, policy support schemes require clear objectives as to what market failures are meant to be addressed. Complementary policies, beyond the scope of this paper, can support other objectives and further ensure the transition to a sustainable corporate sector in the post-COVID-19 economy. - Second, policy support schemes should include strong governance and transparency safeguards to mitigate risks and put in place clear ex ante exit plans. Burden sharing and debt-restructuring schemes that make use of the informational advantage and skills of private creditors can be particularly advantageous. Public creditors should actively participate in debt restructuring. - Third, countries wherein fiscal space is depleted and insolvency systems are ineffective should rely more on out-of-court and hybrid restructuring approaches, while embarking on deeper medium-term reforms of legal and institutional frameworks. - Out-of-court restructuring is based on the negotiation between debtors and major financial creditors, with the possible support of the state and avoids interaction with the courts. - Hybrid restructuring refers to a similar negotiation supported by limited judicial intervention. - Countries with remaining fiscal space have more options and can provide continued support to firms while implementing reforms, where needed, but should be mindful of the risks of zombification and moral hazard. - Fourth, countries with insufficient policy tools or ineffective legal and institutional frameworks to restructure, reorganize, and liquidate firms should urgently address these shortcomings. Some reforms may take time to bear fruit and should be tackled immediately to strengthen preparedness over the medium term alongside with improvements in or development of out-of-court and hybrid restructuring options that take less time to implement. In contrast, improvements in out-of-court and hybrid restructuring can be made relatively quickly and support the short-term performance of the insolvency framework. - Fifth, all countries can improve their crisis preparedness, but priorities differ across them: - Advanced economies tend to have well developed insolvency systems and strong institutional frameworks, but improvements are warranted in areas such as simplifying liquidation procedures; improving technical aspects of their reorganization proceedings, including for small firms; making better use of out-of-court restructuring; continuing to use modern technology in insolvency proceedings; and creating a legal environment more conducive to restructuring. - Emerging market economies have seen improvements in insolvency legislation in recent years, but there is space to strengthen the court system and the regulation of insolvency administrators. Furthermore, most emerging market economies could introduce or improve hybrid restructuring techniques. - Low-income countries need improvements in out-of-court and hybrid restructuring to speed up crisis preparedness, while broad legal and institutional reforms are introduced. - Finally, lenders’ balance sheets need to remain sound. Contingency planning may include reactivating tools used in the past, including during the global financial crisis. Any use of asset management companies should consider that their success hinges on the overall design and governance framework. ### Operational emphases and sequencing - Move from untargeted emergency freeze measures to more targeted policies that: - Shift to solvency support for viable firms; debt relief. - Support structural transformation and asset redeployment. - Support lenders managing risk and capital pressures. - Use a mix of approaches to address case backlogs and large-scale restructuring needs: - Out-of-court and hybrid approaches to reduce pressure on formal insolvency systems and to provide quicker, negotiated solutions. - Court-based reorganization and liquidation where appropriate, with reforms to improve speed and effectiveness. - Ensure policy design features: - Clear objectives addressing specific market failures. - Strong governance, transparency, and ex ante exit plans. - Active participation of public creditors in restructurings and burden sharing with private creditors where feasible. *Source: IMF Departmental Paper — Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis (Executive Summary).* ### 2. Corporate Sector Vulnerabilities ### 2. Corporate Sector Vulnerabilities ### A. Corporate Sector Vulnerabilities: key findings - Global asset prices underwent a sharp and broad-based correction following the spread of COVID-19; in emerging market economies, corporate and sovereign spreads more than doubled, on average. - Policymakers deployed bold fiscal, monetary, financial, and legal measures; initial policy response prioritized speed and alleviating liquidity pressures, which mitigated immediate insolvency risk but contributed to a further build-up of debt. - Corporate and sovereign spreads in the median emerging market economy returned to January 2020 levels by November 2020; advanced economies recovered even sooner. - Since the COVID-19 shock, more than a third of the rise in the nonfinancial firms’ debt-to-GDP ratio can be attributed to an increase in borrowing, while the remainder is explained by the decline in GDP (IMF 2021c, Chapter 2). - Nonfinancial firms had entered the COVID-19 crisis with already-elevated debt levels; increases in indebtedness before the crisis were particularly pronounced in emerging market economies. - Credit to households declined in advanced economies before the crisis, while household credit continued to increase in emerging market economies (remaining well below advanced economy levels). - Despite expectations of rising loan defaults and bankruptcies, insolvencies in many jurisdictions declined in 2020, largely owing to policy support programs; Allianz Research 2021 reports insolvency cases in selected economies decreased by 12 percent in 2020. - A large “COVID-19 bankruptcy gap” emerged, reflecting the difference between actual bankruptcies and those expected based on historical relationships between predictors of bankruptcy rates and economic activity; backlog risks may accumulate as policy support is withdrawn, potentially causing substantial backlogs at courts and negative spillovers for debtors, creditors, and the broader economy. ### B. Crisis preparedness of insolvency systems: framework and indicator - International standard: composite standard formed by the World Bank Principles and the UNCITRAL Legislative Guide on Insolvency Law; prepared in consultation with the IMF and included in the Financial Stability Board’s compendium of standards. - Limitation: comprehensive assessment of compliance with the international standard is not available for a wide range of countries; the paper develops a new crisis-preparedness indicator focused on the existence and availability of tools most useful in a systemic corporate distress context. - Purpose of the indicator: measure the ability of insolvency systems to handle a large scale of corporate insolvencies by assessing techniques, features, and institutions generally relevant for restructuring and insolvency activities and particularly useful in systemic crises. - Data and coverage: independent analysis of primary and secondary sources (national legislation and regulatory instruments, reports, articles); covers 60 countries representing 91 percent of world GDP and 84 percent of the global population; does not constitute legal advice and omits certain areas (directors’ liabilities, avoidance actions, some procedural aspects, cross-border insolvency or enterprise groups). - Indicator structure: - Five equally weighted sub-indicators; each sub-indicator can score up to 20 points, total maximum score of 100. - Grading methodology: elements graded using the ROSC 4-grade scale (0–25, 25–50, 50–75, 75–100); element scores combine to sub-indicator totals (see Annex 3 for detailed weights and elements). - The five sub-indicators: 1. Enhancements to out-of-court restructuring: debt restructuring principles; codes of conduct; master restructuring agreements; administrative debt restructuring schemes; an enabling legal framework; support to SME restructuring; alternative dispute resolution techniques. 2. Hybrid restructuring: pre-packaged reorganization plans; stays of creditor actions to support negotiations; hybrid procedures such as preventive insolvency procedures. 3. Reorganization: debtor-in-possession regimes; stay of creditor actions; treatment of executory contracts; regulation of post-petition finance; approval of reorganization plans; special rules for micro and small firms. 4. Liquidation: assessed against procedural simplicity; sale of the business as a going concern; rules for the sale of collateral; technology and flexibility in the sale of assets. 5. Institutional framework: courts; court technology; regulation of insolvency professionals; regulation of other professions relevant for insolvency (lawyers, accountants and auditors, appraisers). ### C. Indicator results and cross-country patterns - Presentation: Figure 5 displays crisis-preparedness sub-indicators for advanced economies, emerging market economies, and low-income countries, with quartiles and medians shown. - Relationship with corporate vulnerabilities: - Corporate vulnerability metrics (constructed from listed-firm balance sheet data) show a significant proportion of countries experienced an increase in corporate vulnerabilities post-COVID (Figure 6). - In emerging market economies and low-income countries, many countries with larger corporate vulnerabilities also display weaknesses in insolvency resolution. - Weak institutional and legal frameworks for restructuring, reorganization, and liquidation undermine timely and cost-effective resolution of nonperforming loans (NPLs); Figure 7 relates NPL shares in total gross loans to the crisis-preparedness indicator (reverse). - Corporate vulnerability measurement (Box 2): summary score built from six firm-level metrics aggregated to country-level medians and expressed on a 1-to-10 scale: - Firm-level metrics: return on assets (percent), leverage ratio (percent), interest coverage ratio, cash ratio (percent), debt at risk (percent), firms at risk (percent). - Country-level addition: share of investment grade (IG) firms (based on Probabilities of Default from the Credit Research Initiative). - Summary score: simple average of percentiles of individual variables within country income groups; low/medium/high risk classification based on below 33rd percentile, between 33rd and 66th percentile, and above 66th percentile, respectively. For return on assets, cash ratio, and share of IG firms the scale is reversed (lower values correspond to higher risk). ### D. Policy priorities by country group - Advanced economies: - Score better across all crisis-preparedness areas; particularly strong in hybrid restructuring mechanisms and court effectiveness. - Areas for improvement: greater use of out-of-court restructuring; strengthen legal environment for restructuring; refine regulation of executory contracts and post-petition finance; improve rules for approval of reorganization plans; develop special procedures for micro and small enterprises; simplify liquidation procedures and adopt modern technologies for asset sales. - Emerging market economies: - Need to improve institutional framework for insolvency systems; priority to ensure courts have sufficient expertise and resources and to develop regimes for insolvency administrators. - Many could introduce or improve hybrid restructuring techniques. - Improve liquidation and reorganization frameworks; past reforms have tended to improve reorganization more than liquidation. - Low-income countries: - Challenges across all crisis-preparedness areas; serious shortcomings in institutional frameworks may affect insolvency regime assessments. - Priorities: improve out-of-court restructuring and enabling legal environment; introduce hybrid restructuring; modernization aligned with best practices would significantly boost crisis preparedness. *Source: posrfea - 2. Corporate Sector Vulnerabilities (PDF chapter) — Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis.* ### 3. Moving to Targeted Support ### 3. Moving to Targeted Support ### Rationale for targeting support - Prolonging untargeted support risks zombification of firms and exhausting policy space. - Zombies weigh on economic performance because they (1) are less productive, (2) lead to lower investment in and employment at more productive firms, and (3) stifle entry and growth of new firms (Adalet McGowan, Andrews, and Millot 2018, Banerjee and Hofmann 2018, 2020). - The choice between targeted support and restructuring should consider the nature of firms’ difficulties: - If firms’ business model weaknesses put viability into question, restructuring becomes essential. - If difficulties are judged temporary and the business model is viable, targeted support should be extended. - Assessments of viability are subject to significant uncertainty and risks. ### Policy options by fiscal space and insolvency capacity (summary of Figure 8) - Countries with more fiscal space and effective insolvency systems: - Options include continued liquidity support, direct equity injections, or more market-driven debt restructuring. - Can enable out-of-court and hybrid restructuring; increase capacity of insolvency system if needed. - Countries with depleted fiscal space or weak insolvency systems: - May need to discontinue broad support and risk a wave of insolvencies and disorderly debt restructuring. - Should enable out-of-court workouts and introduce legal and institutional reforms. - Trade-offs and risks: - Public equity and equity-like support increases fiscal risk, especially when government picks winners and losers. - Poorly targeted support prolongs misallocation, limits private debt restructuring and burden sharing. - Withdrawal of support can increase financial stability risk. - Financial sector state matters: - Countries with elevated pre-existing NPLs need urgent measures for supervision, insolvency systems, and distressed debt markets. - Resolving NPLs stimulates demand for new loans and facilitates restructuring for viable firms. - Asset management companies (AMCs) can catalyze resolution of impaired loans and support distressed debt markets. ### Insolvency, restructuring modalities, and triage (Box 3 and Table 1) - Use of out-of-court and hybrid solutions can support formal insolvency processes relatively quickly; judicial reforms take time. - In crisis scenarios with large caseloads: - Out-of-court and hybrid restructuring can handle many cases, leaving courts to focus on complex reorganization cases. - Nonviable firms need prompt liquidation; reorganizing firms is time-sensitive. - Triage framework (Box 3): - Firms divided into three groups: - Not viable → liquidation. - Distressed but viable → need restructuring (financial and/or operational). - Distressed but will recover without restructuring/support. - Financial-only restructuring may be feasible out-of-court or via hybrid approaches; firms needing operational restructuring typically require judicial reorganization. - Table 1: choice between in- and out-of-court approaches depends on viability and creditor agreement - Viable; financial restructuring; unanimous or broad creditor agreement → informal or enhanced out-of-court restructuring. - Viable; financial restructuring; majority agreement to bind holdout creditors → hybrid restructuring. - Viable; financial and operational restructuring; majority agreement to bind holdout creditors → reorganization (judicial). - Nonviable; reallocate assets, distribute proceeds; no need for agreement → liquidation. ### Complementary measures and structural considerations - COVID-19 induces structural change (consumer preferences, supply chains, longer-term global shifts) requiring business model adaptation. - Promoting corporate restructuring frees resources for new growth areas and adjustment. - Complementary policies (outside scope of this paper) could support labor, product market and regulatory reforms, and transition to a greener and more digital economy. - Policies to “steepen the start-up curve” can complement efforts to “flatten the insolvency curve.” - Examples cited: - France: set up a €4 billion fund to support start-up liquidity, including bridging start-up funding. - Germany: announced a tailored start-up aid program, expanding and facilitating venture capital financing. - United Kingdom: announced a co-financing fund for innovative companies facing financial difficulties (OECD 2020). ### Lessons from past crises and implications for sequencing - Tequila Crisis (Mexican peso crisis): - Highlighted need for strong banking supervision, enforcement capacity to incentivize restructuring, effective insolvency systems, and strong institutions. - Loan guarantees in the 1995 bailout helped restructure short-term debt but macroeconomic shocks induced steep increases in loan defaults. - Asian financial crisis: - Showed corporate restructuring is essential for recovery and needs an adequately capitalized financial sector. - Where insolvency systems were weak, out-of-court restructuring, supported by the state, was a viable alternative for large companies. - Global Financial Crisis (GFC) and subsequent European debt crisis: - Direct state support was deployed only for extremely large companies; the bulk of firms restructured via out-of-court, hybrid, and judicial proceedings where insolvency systems were relatively strong. - Peaks in insolvency cases produced backlogs and excess liquidations. - European crisis affected SMEs more; hybrid restructuring became more important given reliance on judiciary and distrust of negotiated solutions; highlighted the growing role of distressed asset funds. - Differences in the current crisis: - Many past crises stemmed from precrisis vulnerabilities; in the COVID-19 context, financial sector impact may manifest later, affecting sequencing of (1) support to firms, (2) restructuring, and (3) financial sector support. - The state has become a major creditor through explicit and implicit public guarantees and other claims. - Exiting government support may be difficult and depend on the type of support (for example, role as shareholder, debt-equity swaps). - Insolvency regimes and in-court capacity have improved in many countries, expanding feasible solutions relative to past crises. *Source: IMF Departmental Paper — Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis (chapter 3).* ### 4. Solvency Support ### 4. Solvency Support ### A. How to Allocate Policy Support - Policy support should be targeted toward viable firms that cannot obtain financing (equity or debt) at reasonable cost through private markets. - Viability determination involves: - Making projections about the future capacity of the firm to generate income and service debt, and assessing whether the firm can generate an adequate return on investment. - Comparing liquidation value (the recovery value of the assets if the firm were liquidated now) with the firm’s net present value (discounted future cash flows). - Recognizing heightened uncertainty due to structural change induced or accelerated by the COVID-19 shock. - Practical considerations for viability determination: - Creditor-driven: viability assessment can be conducted by financial institutions supported by the government and aided by third-party specialists. - Transparent criteria and data: use financial data gathered before and during the pandemic, and projections for the post-COVID-19 economy. - Risk-based: allocate resources to sectors and firms with relatively better recovery prospects while facilitating liquidation of non-viable businesses and reallocation of resources; this approach does not prevent extending support to some nonviable firms (Bernstein and others 2019a, 2029b, Liu, Garrido, and DeLong 2020). - Prioritization: channel support to viable firms without market access; when resources are limited, prioritize viable firms strongly affected by the pandemic that employ a significant number of people or are dedicated to activities essential for the economy and society. - Targeted support versus restructuring: support is more effective for firms with solid business models facing temporary difficulties; firms with lasting underlying problems should undergo restructuring to ensure recognition of losses and emergence with sufficient capital, a sustainable debt burden, and a viable business model. - Footnote context: - Viability is traditionally assessed at the individual firm level; for small firms this can be costly and inefficient. Chapter 6 (not reproduced here) discusses standardized restructuring approaches for SMEs. Tressel and Ding 2021 propose methods to compensate for lack of timely data. ### B. Forms of Policy Support - The government can provide solvency support through: 1. Equity and equity-like instruments: - Examples: non-voting preferred shares, convertible bonds, profit participation constructs (do not alter control). - Unincorporated firms (common form for micro and SMEs): hybrid instruments (subordinated loans, profit participation loans conditional on positive enterprise returns) may be the only feasible option besides grants; such instruments with government participation can catalyze private equity and improve reporting and monitoring. Grants can be used for micro-firms given limited reporting disclosures (Ebeke and others 2021). - Incorporated SMEs: options include subordinated debt instruments, non-voting preferred shares, (contingent) convertible bonds (conversion conditional on performance); public sector may participate in profits in return for longer repayment periods without taking managerial control (see Bauer and others 2021). - Large firms: rebalancing capital structure is straightforward if equity markets can be accessed or debts restructured with creditors; for many unlisted firms markets may not supply needed equity and government equity can be considered if the business is viable. 2. Other instruments: - Conditional and unconditional debt relief, loan forgiveness (for example, United States), cancellation of tax and social security liabilities (for example, United States CARES Act 2020). - Indirect solvency support: tax relief for financial intermediaries, support of investor balance sheets via public-private investment, public guarantees, or other forms of risk transfer. - Policy options: reduce or eliminate the tax advantage of debt (for example, Italy and Turkey) and provide incentives for debt-to-equity conversions. - Safeguards for provision of solvency support: - Based on transparent selection criteria focusing on distressed but viable firms. - Limited to firms that became distressed due to the pandemic; firms already in distress prior to COVID-19 should be excluded and instead be restructured. - Designed to mitigate growth and financial stability implications from debt overhang problems—other policy objectives can be pursued if synergies exist. - Limited to a specific pre-announced time-period. - Include a clear exit-strategy to reduce longer-term uncertainties regarding government involvement and the path to independence. - Footnote context: - Grants (and certain other direct transfers) can be effective for SMEs, especially when other measures are difficult to assess and administer and the overall fiscal impact is relatively small. ### C. Lessons from Past Episodes of Solvency Support - Strategic bailouts can have substantial near-term fiscal impact and medium-term risks. - Example: Global Financial Crisis bailouts of large strategic corporations (automotive industry) in advanced economies (Grigorian and Raei 2010). - The three major US auto companies—General Motors, Chrysler, and Ford—were deemed too big to fail, directly employing 240,000 people. - The US government provided about $81 billion in loans and equity investments. - Unconditional solvency support through debt relief should generally be avoided (except limited grant-like programs for micro firms): - Typically fails to distinguish viable from nonviable firms, leads to moral hazard, and carries significant fiscal costs. - Debt transfer from private sector to government instead of debt restructuring creates incentives for poor risk management by borrowers and banks due to lack of burden sharing (Calomiris, Klingebiel, and Laeven 2004). - Experience with debt substitution rather than restructuring has been mixed (Laryea 2010). - Conditional debt relief as part of workout programs: - Can provide support while incentivizing debt resolution and burden sharing. - Government subsidies should be conditional on both lenders and borrowers contributing to debt resolution to motivate market participation, increase burden sharing, and lower taxpayer cost. - Financial institutions not in severe distress may help drive debt restructuring. - Burden sharing is critical: - Mexico’s Punto Final program (1998) involved burden sharing among lenders, government, and borrower. Government and lenders offered predetermined haircuts depending on program, loan amount, and whether the bank restarted lending to enterprises. New loans to SMEs qualified for additional government discount to support fresh funds for restructurings. - Table 2 (not reproduced here) compares Mexico’s Punto Final program with a recent proposal by Blanchard, Philippon, and Pisani-Ferry 2020: the proposal foresees markets leading haircut determination with government matching banks’ discount and providing a continuation premium to bridge private and social firm values. - Mexico’s Punto Final Program (summary highlights): - As part of the SME leg, discounts varied according to four criteria: 1. Larger discounts applied to lower tranches to provide greater relief to smaller-sized firms. 2. Government granted discounts only after banks contributed to the first part of the discount (ensured burden sharing). 3. Government granted additional discount depending on loan amount granted to SMEs to secure fresh funds: for every 3 pesos of credit granted to the SME sector, the government would grant an additional peso of discount up to a threshold. 4. Discount, applied to interest and principal payments, was granted only if borrowers were up to date with payments. - Program reach and cost: - Beneficiaries: 800,000 agricultural or fishing farms, 212,000 SMEs, and 456,000 mortgage loan holders. - Estimated cost: 3.3 percent of GDP, shared between the government and the banks in different proportions according to type and amount of loans. - Success factors: - (1) loss-sharing mechanism geared toward small loans, - (2) incentives for banks to restart lending, - (3) self-selection, - (4) effective dispute settling mechanism. - Shortcomings due to institutional weaknesses: - Lack of credible supervisory authority with sufficient enforcement capacity to incentivize financial institutions to recognize losses and engage in corporate restructuring. - Inefficient insolvency system (deficiencies in courts and insolvency administrators). - Presence of politically connected lending where politicians, business groups, and banks are intertwined, seeking mutual advantage at taxpayers’ expense (Calomiris, Klingebiel, and Laeven 2004). - Box Table 4.1. Punto Final Program: SMEs Discount Rates and Burden Sharing (excerpted figures preserved as in source): - Loan tranches (pesos) — Banks (%) — Government (%) — Government (conditional; %) — Total marginal discount rate (%) — Total average discount (%) - 0–500,000 — 22.5 — 9 — 13.5 — 45 — 45 - 500,000–2,000,000 — 8.5 — 6.4 — 5.1 — 20 — 45–26.25 - 2,000,000–10,000,000 — 0 — 0 — 0 — 0 — 26.25–5.25 - Source: Comisión Nacional Bancaria y de Valores (CNBV), Circular 1420. - Table 2. Conditional Corporate Debt Relief (comparative highlights preserved as in source): - Punto Final Program (Mexico, 1998) vs. Blanchard and Others 2020 (Covid-19 Crisis): - Context: Mexico (1998) — Covid-19 Crisis. - Program: Debt relief for SMEs — Debt relief for enterprises. - Type: Government-led debt-relief program — Market-led debt relief program. - Total discount: Up to 60% of the book value of the loan — Haircut agreed by private creditors (32) plus a fixed continuation premium (example: between 20 percent and 30 percent). - Discount setting: Set by the government — Market determined. - Bank contribution: Pre-set discount which depends on program and amount of loan — Banks decide discount. - Government contribution: Pre-set discount depending on program, amount of loan, and whether bank restarted lending — Government matches bank’s discount automatically. - Borrower contribution: Relief offered to debtors current with loan payments — Not discussed. - Incentives for fresh funds: For every three pesos of new loans extended by the bank to the sector, government would assume an additional one peso of discount (only new loans to individuals and SMEs qualify) — Not discussed. - SME targeting: Loss sharing geared towards small loans — Not discussed. - Institutional framework matters: - Effectiveness of conditional debt relief programs depends on credible supervisory authority, effective insolvency systems, and avoiding clientelism. Design and implementation should involve relevant ministries and regulatory agencies (commercial registries, tax administration, small business administration, bank supervisors) to coordinate cross-agency issues, including data gathering and sharing. ### 5. Promoting Corporate Restructuring (introductory points) - Countries expecting insolvency caseloads to exceed capacity limits should increase system capacity and/or “flatten the curve” of insolvencies. - Key priorities: - Address limited capacity of the judicial system to deal with increased caseloads. - Use restructuring techniques to complement full, formal insolvency proceedings to avoid overwhelming courts. - Reduce full formal insolvency cases to levels manageable by the insolvency system by designing and promoting alternatives to formal insolvency. - Out-of-court restructuring: - An effective way to increase insolvency system capacity, particularly during corporate debt crises (Garrido 2012). - Generally available: negotiations between debtors and creditors without court intervention, typically involving financial creditors (and sometimes large trade creditors). - If broad agreement among financial creditors is achieved, debt can be restructured without affecting other creditors (for example, workers or small trade creditors). - Techniques to enhance out-of-court restructuring for large corporate debtors: - Guidelines: Voluntary codes of conduct (example: INSOL Principles for Multi-Creditor Workouts) that set expected behavior of debtors and creditors; can be endorsed by national banking association or bank supervisor. - Master restructuring agreements: Financial institutions agree in advance on steps for corporate restructurings, including majority decision mechanisms for workouts. - Incentives and disincentives (“carrots and sticks”): State can promote out-of-court restructuring by providing beneficial treatment of workouts (e.g., favorable tax treatment). With the state as a major creditor in the current crisis, stronger incentives—such as higher haircuts on [text truncated in source]—may be appropriate. - Footnote context: - Building insolvency system capacity is challenging; the United States created temporary bankruptcy courts leveraging retired bankruptcy judges and insolvency lawyers. Iverson, Ellias, and Roe 2020 estimate that between 50 and 246 additional temporary bankruptcy judges are needed in the United States and suggest re-appointing retired bankruptcy judges. - The financial supervisor could have a persuasive role in mobilizing financial institutions to commit to restructuring frameworks (Garrido 2012). - Special regulatory treatment of restructured loans, in terms of classification and provisioning, is more controversial. *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis* ### Box 5. The INSOL Principles for Multi-Creditor Workouts ### Box 5. The INSOL Principles for Multi-Creditor Workouts ### Overview - Since 2000, the INSOL principles are regarded as a statement of best practice for multi-creditor out-of-court workouts, building on the “London Approach” developed by the Bank of England in the 1970s. - The London Approach main elements were designed to: (1) keeping facilities in place and not appoint receivers; (2) information sharing among creditors to help decision making about company long-term viability; (3) form collective view on need for additional lending; (4) seniority of claims recognized but equal treatment for all creditors in a single category. - INSOL International’s statement sets out eight principles for a global approach to multi-creditor workouts. ### The Eight INSOL Principles - I. Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (a “Standstill Period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case. - II. During the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the Standstill Period their position relative to other creditors and each other will not be prejudiced. Conflicts of interest in the creditor group should be identified early and dealt with appropriately. - III. During the Standstill Period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the Standstill Commencement Date. - IV. The interests of relevant creditors are best served by coordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole. - V. During the Standstill Period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors. - VI. Proposals for resolving the financial difficulties of the debtor and, so far as practicable, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the Standstill Commencement Date. - VII. Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential. - VIII. If additional funding is provided during the Standstill Period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practicable, be accorded priority. ### Role and Complementary Features of Out-of-Court Restructuring - Key supporting elements: - Incentives and disincentives: credible threat of insolvency or debt enforcement and fines for unjustified delays promote workouts. - Administrative support: endorsement and administrative support of the state benefit out-of-court restructuring. - Assistance by restructuring experts: national or international experts add credibility, effectiveness, and efficiency in viability analysis and preparation of restructuring agreements. - Dispute resolution: mediation, conciliation, or arbitration with legal experts and use of ADR techniques contributes to agility. - Out-of-court restructuring can be implemented quickly and scaled, but requires agreement by the financial sector, support from the banking supervisor, state commitment, and sufficient pressure on firms to negotiate. - Complex cases with serious creditor conflicts may still require court handling. ### SME and Micro/Small Firm Considerations - SMEs benefit from simpler and economical out-of-court approaches because each case is typically low-value and costly formal mechanisms are inappropriate. - Useful characteristics for SME-focused out-of-court restructuring: - Code of conduct: voluntary guidelines focused on debtor-creditor relationship; many SME cases involve minimal number of creditors and often bilateral negotiations with a single financial creditor. - Standardized restructuring: using basic economic indicators to establish indicative viability and standard conditions to rehabilitate SMEs—positioned between tailor-made solutions and across-the-board measures. - Standardized approaches are less precise but simpler and less costly than individualized viability analyses. - Assistance to debtors: state-provided advisory services and access to financial programs (examples cited: Japan, Korea). - Some countries introduced efficient frameworks for micro and small firms during the pandemic; formal reorganization proceedings are often too complex and costly for smaller firms. - Special insolvency frameworks for micro and small enterprises often follow the debtor-in-possession model. - A new simplified U.S. reorganization procedure was introduced in February 2020. ### Hybrid Restructuring: Design and Use - Hybrid restructuring uses limited judicial intervention to address hold-out creditors and creditor enforcement actions. - Typical features: - Stay of creditor actions to prevent enforcement that would paralyze the business. - Judicial confirmation of a restructuring plan adopted by a majority to bind dissenting creditor minority. - Pre-packaged insolvencies: - A pre-pack is an application for reorganization that already includes a reorganization plan and necessary creditor support; courts can confirm plans within a short period while verifying legal requirements. - Pre-packs minimize hold-out problems and judicial resource use but need safeguards against fraudulent fast-track use. - Examples of frequent pre-packs: United States, Korea, the Netherlands, and the United Kingdom (note: in the United Kingdom, “pre-pack” has a specific and different meaning: a pre-agreed sale of the company as a going concern that is confirmed in an insolvency process). - In U.S. practice, distinction exists between “pre-packaged” and “pre-arranged” reorganizations. - Based on published information (The Deal Pipeline and FTI consulting), the average ordinary reorganization procedure in the United States during the 2011–18 lasted 504 days. Pre-packaged reorganizations for the same period lasted only 77 days on average. A recent pre-packaged case in the United States lasted only 16 hours. - Pre-insolvency procedures: - Combine out-of-court restructuring and judicial insolvency aspects, using limited judicial intervention both for stays and for plan confirmation. - Widely used in Europe (France, Germany, Italy, Spain, and all European Union countries incorporating the European Union Restructuring Directive) and in countries such as Argentina and Brazil. - Hybrid restructuring typically becomes a permanent element of the insolvency system, while out-of-court mechanisms can be temporary. ### Lessons from Past Episodes of Out-of-Court and Hybrid Restructuring - Arbitration with specific deadlines can reduce reliance on formal judicial processes: - Korea (1997) created the Corporate Restructuring Coordination Committee (CRCC) to assess viability, arbitrate creditor differences, enforce decisions, and modify workout plans. Within one month of an application for arbitration from a presiding bank, CRCC provided a written opinion to all the debtor’s financial institution creditors and the relevant regulatory agencies. - Penalties for failure to meet deadlines can incentivize compliance: - Korea (1997): if a signatory failed to comply with an approved workout agreement or an arbitration decision, CRCC could fine the signatory up to 30 percent of the credit amount in question or up to 50 percent of the cost of non-compliance. CRCC decided the criteria for distributing the fine among other financial institutions. - Incentives to provide fresh funds facilitate restructurings: - Turkey (2001) “Istanbul approach” allowed companies to supplement borrowing for liquidity shortfalls or pressing maintenance needs. - Korea (1997) established a series of restructuring funds (three debt and one equity fund) managed by international, accredited fund managers, with the Korean Development Bank as the main investor; government established a real estate investment trust to allow sales and leasebacks with repurchase options. - Financial supervisory authorities should encourage broad creditor participation: - Korea (1998): 210 local financial institutions signed the corporate restructuring agreement, encouraged by Turkey’s Financial Supervisory Commission. - Turkey re-introduced an out-of-court restructuring framework in 2018; the “Istanbul Approach 2.0” is based on a regulation contemplating a framework restructuring agreement, signed by Turkish lenders and open to foreign banks. - Out-of-court workouts depend on the quality of formal insolvency proceedings: - Formal insolvency systems provide the backdrop for workout negotiations; weak insolvency regimes can impede voluntary workouts and may necessitate external assistance and fiscal space to support restructuring incentives while reforming insolvency regimes. - U.S. experience: - Out-of-court restructuring was prominent in the 1980s; during the global financial crisis legal innovations blurred lines between Chapter 11 and out-of-court restructuring, leading to prepackaged or pre-negotiated Chapter 11 filings combining features of both. - European experience: - Out-of-court restructuring gained less traction compared with Asia due to more developed insolvency systems and cultural/legal preferences for judicial dispute resolution; hybrid frameworks with pre-packs and preventive insolvency procedures with limited court intervention were used. - During 2009-2015, several European countries upgraded insolvency regimes in line with international best practices; examples of reforms include simplifications, debt-to-equity swaps, pre-insolvency procedures, and fast-track prepacked insolvency procedures. - By 2015, despite economic stabilization, NPLs continued to increase in many stressed economies, with persistent NPLs linked to unresolved private debt overhang; lack of simplified and cost-effective frameworks for micro and small firms was a key obstacle to NPL resolution. - Global reform momentum: - Since the aftermath of the GFC, insolvency and restructuring reforms continued across regions; examples of reforms cited include Chile (2014), Mexico (2014), India (2016), UAE (2016), Singapore (2018), Ghana (2020), and Brazil (2020). Some countries preserved or revamped debt restructuring mechanisms from prior crises (examples: Korea, Malaysia, Turkey). *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis* ### 6. Building More Effective Insolvency Regimes ### 6. Building More Effective Insolvency Regimes ### Role and context - Insolvency and debt restructuring perform two crucial functions: restructuring viable firms and liquidating nonviable firms, facilitating redeployment of assets to more productive uses. - In episodes of severe corporate debt distress, insolvency and debt restructuring mechanisms need to be adapted to respond to large increases in distressed firms. - The relative importance of insolvency and debt restructuring during the COVID-19 crisis depends on factors including the severity of the crisis, the quality and capacity of the insolvency system, availability of alternatives to full formal insolvency proceedings, and remaining fiscal space. - Judicial insolvency proceedings (reorganization and liquidation) address distinct cases: reorganization for financial and operational restructuring; liquidation for nonviable firms. ### A. Reorganization - Firms needing financial and operational restructuring should be addressed by formal reorganization; operational restructuring often requires judicial intervention (changes in contractual relationships and workforce). - Reorganization proceedings are complex, demand technical rules, and require an elevated level of judicial expertise; countries should assess proceedings against standards such as the UNCITRAL Legislative Guide. Key desirable features of reorganization proceedings: - Debtor-in-possession: Allows debtors to continue managing businesses while in reorganization, creating an incentive to enter early. This model has been adopted in numerous countries in Europe, Asia, and Latin America, and the United States. - Stay of creditor actions: Prevents enforcement remedies and seizure of assets during judicial proceedings, avoiding a destructive “creditors’ race” and preserving going-concern value. Secured creditors’ rights must be protected; models exist in the United States, Korea, Germany, and the European restructuring Directive. - Executory contracts: Effective reorganization law permits honoring contracts necessary for viability and canceling unprofitable contracts. United States law is the standard; Australia and Singapore are converging on this approach. The treatment of executory contracts presents challenges in some countries (for example, India, Turkey). - New finance (post-petition finance): Obtaining new funding is imperative; enabling such financing typically requires giving priority to providers of fresh funds with safeguards for existing creditors. Legislation is necessary but may be insufficient if banking regulation creates disincentives. During crises the market for new funding can dry up quickly (Grigorian and Raei 2010). Proposals in the United States include creating special government financing facilities for distressed firms (Brunnermeier and Krishnamurthy 2020; DeMarzo and others 2020; Skeel 2020b). - Class formation and “cram-down” in approval of plans: Reorganization aims to confirm a plan to restore viability. Creditors are separated into classes; majority requirements may be combined with cross-class cram-down.1 Dissenting parties are protected mainly by guaranteeing they receive at least the same payments as in liquidation and by respecting distribution priority among classes. The United States model has been replicated with variations in the European restructuring Directive; Japan and Korea have similar systems. Additional policy notes: - Consider simplified, lower-cost reorganization procedures for smaller firms (micro and small enterprises), typically by eliminating creditor committees, reducing deadlines, and assisting debtors in plan preparation (Diez and others 2021). - Role of the state: When governments provide ample support, their creditor position strengthens. Governments can incentivize reorganization by taking higher haircuts on their claims than private creditors, acting as a “premium for continuation.” Priorities for tax and social security claims can complicate state participation; where states hold more significant creditor positions, active participation in restructuring and insolvency proceedings is imperative. 1 Cross-class cram-down means that the plan can be confirmed even if one or several of the creditor classes vote against the plan, provided that procedural and substantive safeguards are respected. ### B. Liquidation - Liquidation provides an exit mechanism for nonviable firms and facilitates redeployment of assets, performing two functions: (1) maintaining competition by removing inefficient firms and (2) minimizing damage to creditors through recovery of proceeds. - Many firms exit the market without judicial liquidation; lack of significant assets or plurality of creditors may not justify liquidation costs.2 Deregistration with commercial registries and tax authorities also reflects firm exits.3 - Liquidations are often ineffective at minimizing creditor damage given destruction of value at non-viability and market failures that can depress liquidation sales; widespread liquidations can cause fire-sales and a downward spiral, potentially requiring public intervention such as subsidies to reduce liquidation costs. Specific reforms to improve liquidation efficiency: - Effectiveness and procedural simplicity: Liquidation should proceed fast; providing the liquidator sufficient powers and limiting the court to a supervisory role helps. Separating sale of assets from verification and ranking of claims can accelerate the process and reduce losses. - Sale of the business as a going concern: Law should allow sale of the business as a going concern or sale of productive units before piecemeal asset sales, typically yielding larger proceeds. Some legal systems (Spain, France, Poland) include this hierarchy; this requires a short stay on secured creditors’ actions to avoid dismemberment. - Sale of collateral: Secured creditors should be able to enforce claims on collateral as soon as possible, with flexibility in sale methods and appropriate safeguards for other creditors. - Use of technology and flexibility in sale methods: Electronic platforms and e-auction systems can advertise judicial sales, publish asset information, be more resistant to manipulation, and provide better opportunities for bidders (examples: Greece, Hungary, Italy, Spain). Law should avoid mandatory public auctions for all asset classes. Policy priority in crisis: - In a crisis, supporting quick restructuring and reorganizations is more important than accelerating liquidations. Liquidations can be slower than reorganizations due to complex litigation and lack of debtor incentives; delayed liquidations increase damage to creditors and the economy and undermine turning firms around. 2 In cases where there is a significant asset (for example, real estate) and a major creditor (that is, bank with a mortgage over the real estate), the adequate legal response is the use of debt enforcement mechanisms, rather than a liquidation process. 3 In some countries, the number of liquidations tends to be much higher because of the effect of personal liability rules: when directors of a company are under the duty to file for insolvency, at the risk of incurring personal liability, and such duty is actively enforced, the number of liquidations soars. ### C. Institutional Framework for Insolvency - Effective insolvency regimes require a proper institutional framework with specialized personnel; changes in institutional frameworks typically take a long time to implement. Measures to improve insolvency institutions: - Specialization of judges: Some countries have specialized insolvency courts (Korea, Thailand, United States). Where insolvency activity does not justify special courts, establishing commercial courts for corporate and commercial cases provides excellent specialization (for example, France, Spain, United Kingdom). - Use of technology: The pandemic accelerated the digital transformation of justice. Greater use of technology increases efficiency—examples include electronic case management, electronic communications, virtual court hearings, virtual creditor meetings, and remote voting systems (Israel, Korea, United States). - Regulation of insolvency professionals: Insolvency professionals (liquidators, examiners, experts) are essential and need appropriate regulation including entry requirements, rules of conduct, supervision, and a sanctioning regime. Countries such as Australia, India, and the United Kingdom have comprehensive regimes. - Regulation of support professionals: Supporting professions (lawyers, accountants, auditors, appraisers) must be properly regulated for the system to be fully functional; regulation gaps are frequent in low-income countries. - Use of data: Devote resources to collection and analysis of insolvency data to assess system performance and support reform design (Garrido and others 2019). *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis — Chapter 6* ### Annex 4 provides a more in-depth description of country cases. ### posrfea - Annex 4 provides a more in-depth description of country cases. ### Conclusion: strategy for corporate sector recovery and restructuring - The COVID-19 pandemic inflicted a significant damage on the enterprise sector requiring a strategy to support its recovery, including restructuring. - A wave of corporate insolvencies has not materialized owing to the wide-ranging and unprecedented policy support and improved economic prospects due to vaccine rollouts. - Solvency risks in the corporate sector have not fully dissipated and will need to be managed as untargeted policy support is removed. - Objectives of a comprehensive strategy: - Avoid zombification of firms. - Address corporate debt overhang. - Ensure a sustainable corporate sector in the post-COVID-19 economy. - Core elements of the multipronged strategy: - Targeted support and legal reforms to facilitate debt restructuring, liquidation, and reorganization of firms. - Collaboration between government agencies and the private sector for data gathering on corporate distress (for example, commercial registries, tax authorities, and the financial sector). - Deployment of restructuring and insolvency tools alongside support measures. - Direct any additional support to viable firms with no market access. - Ensure legal and institutional reforms to enable effective restructuring/reorganization of viable firms and exit of nonviable ones. - Broad considerations and policy guidance: - First: policy support schemes require clear objectives as to what market failures are meant to be addressed; complementary policies can support other objectives and the transition to a sustainable postcrisis economy. - Second: policy support schemes should include strong governance and transparency safeguards and clear ex ante exit plans; burden sharing and debt-restructuring schemes that leverage private creditors’ informational advantage and skills can be particularly advantageous; public creditors should actively participate in debt restructuring. - Third: where fiscal space is largely depleted and the insolvency regime is ineffective, rely on out-of-court and hybrid restructuring approaches while legal and institutional reforms are adopted; countries with ample fiscal space have more options but should be mindful of zombification and moral hazard risks. - Fourth: countries with insufficient policy tools or ineffective legal and institutional frameworks should urgently address shortcomings; some reforms take time and should be started immediately to strengthen medium-term preparedness; out-of-court and hybrid restructuring options can be developed relatively quickly to support short-term insolvency performance. - Fifth: crisis-preparedness priorities differ by country group: - Advanced Economies (AEs): advantage in insolvency framework quality due to law applied by strong institutions; many AEs are increasing use of hybrid restructuring; recommendations include simplifying liquidation proceedings, adjusting technical aspects of reorganization (including for small firms), better use of out-of-court restructuring, continued use of modern technologies in insolvency proceedings, and creating a legal environment more conducive to restructuring. - Emerging Markets (EMs): have seen improvements in insolvency legislation, but many technical aspects can improve; priority should be strengthening the court system and insolvency administration. - Low-Income Countries (LICs): face important challenges in institutional frameworks and operation of insolvency laws; improving out-of-court and hybrid restructuring would increase crisis preparedness faster. - Finally: contingency plans will be needed to ensure lenders’ balance sheets remain sound as losses from corporate exposures materialize; tools used in the past, including during the global financial crisis, can be reactivated; any use of asset management companies should consider that experience suggests success hinges on overall design including governance framework. ### Annex 1: Policy Support Measures during the Freeze Phase - Fiscal policy support provided temporary relief and helped firms cover immediate financing needs. - Types of fiscal measures deployed (examples and country mentions): - Wage subsidies: often conditional on maintaining employment or restructuring (Canada, EU member states, Japan, New Zealand, US). - Job retention schemes: typically involve a reduction in work hours but maintain employment (Kurzarbeit examples: Austria, Canada, Germany, France, United Kingdom). - Grants: for businesses directly affected by health-authority restrictions. - Direct lending by government or support for loans provided by financial institutions, often with subsidy or guarantee elements (examples: Germany’s KfW (2020), the USDA 2020 Lending Program, United States CARES Act 2020, GOV.UK (2020)). - Negative taxes and refundable tax credits (US Employee Retention Credit; Paycheck Protection Program). - Deferral of tax and social security liability payments (IMF Policy Tracker 2021). - Expenditure policies supporting a green recovery: public investment in sectors and firms that support sustainable long-term growth (Colombia, EU, Japan, Korea, Morocco, New Zealand, Nigeria). - Monetary policy measures: - Near-zero policy interest rates, aggressive forward guidance, asset purchases in the secondary market, and establishment of less stigmatized alternatives to discount windows. - Federal Reserve’s dollar swap lines helped ease concerns around dollar shortages in the global financial system. - Regulatory and accounting forbearance: - Policymakers eased financial regulation and used flexibility in financial and accounting frameworks (for example, BCBS 2020) to limit or postpone provisioning, recognition, and accounting of loan losses and to modify loans without classifying them as restructured, where possible (IMF 2021b). - Legal changes to reduce insolvency flows: - Moratoria on debt enforcement and insolvency to avoid surges in insolvency cases (examples: France, Germany, India, Italy, Turkey). - Note: In India, a moratorium in June 2020 covered defaults occurring from March 25, 2020 and lasted for 12 months. - Suspension of the duty to file for insolvency (examples: Australia, France, Germany, India, Italy, Singapore, Spain, United Kingdom). - Accommodations for ongoing insolvency cases, including “mothballing” practices and extensions or amendments to reorganization plans (examples: France, Italy, Portugal). - Appendix Table 1.1. Fiscal Expenditure and Revenue Measures to Support Liquidity (categories and country examples): - DIRECT: Direct grants, direct lending with government as creditor; Wage subsidies; Job retention schemes; Negative taxes; Expenditure policies supporting a green recovery. - Country examples: Germany, US, UK; Canada, EU member states, Japan, New Zealand, US; Canada, EU member states (especially Austria, France, and Germany); US Employee Retention Credit; Paycheck Protection Program; Colombia, EU, Japan, Korea, Morocco, New Zealand, Nigeria. - INDIRECT: Postponing, reducing or canceling tax and social security liability payments; Loan guarantees to incentivize liquidity provision through market. - Country examples: Many countries; Many countries. - Source: Authors ### Annex 2: Measuring Corporate Vulnerabilities and Data Notes - Data coverage and metric definitions: - Based on 2020 annual reporting data for publicly listed firms. - Return on assets calculated as (EBIT * 0.625) / ((Total Asset(t) + Total Asset(t-1))/2) expressed as a percentage. - Leverage ratio is total liabilities as percentage of total assets. - Interest coverage ratio is the ratio of EBIT to interest expense. - Cash ratio is the ratio of cash and cash equivalents to current liabilities expressed as a percentage. - Debt at risk is defined as the total debt of public firms with ICR below 1 as a percentage of total debt of all public firms in the sample. - Annex Figure 2.1: Corporate Debt Vulnerability Matrix by Country Groups presents country-level indicators including: - Return on asset (%) - Summary score [1–10] - Share of IG firms (%) - Debt at risk (%) - Cash ratio (%) - Interest coverage ratio - Leverage ratio (%) - Data challenges and caveats: - The analysis excludes private unlisted nonfinancial companies, which make up a large share of gross value added and total employment in many economies. Orbis data are available but the latest year available is 2017. - Missing network dimension: interconnectedness with the banking sector, ownership, supply chains, and other linkages could increase vulnerabilities; distress in one firm (or group) could spread through these linkages. - Corporate defaults tend to cluster in time (see Das and others 2007). - Data on insolvencies are sparse; total number of insolvencies for a large cross-section of countries are difficult to access. Euler Hermes provides cross-country data on insolvencies and forecasts using a three-step process: - 1) a quantitative econometric analysis utilizing macro-variables; - 2) adjustment for country-specific factors (for example, insolvency legislation on new businesses (startups mortality), financing conditions, sector-specific issues, and government measures targeting the sector); and - 3) judgement by Euler Hermes experts. *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis* ### Annex 3. Indicator for Crisis ### Annex 3. Indicator for Crisis ### Justification and Purpose - The indicator measures the crisis preparedness of insolvency systems by examining the existence and availability of legal tools, techniques, features, and institutions most relevant for addressing widespread corporate debt distress. - It is designed to capture features that increase the ability of insolvency systems to respond to corporate debt crises, not to offer a general assessment of the quality, effectiveness, or efficiency of insolvency regimes under normal circumstances. - Based on past crises, an annual increase of "200 percent" of insolvency cases or more tends to create serious issues and severely affects the functioning of the insolvency system. ### Technical description: overall structure and scoring - The indicator is a composite with a maximum score of "100". - It comprises five sub-indicators; each sub-indicator has the same weight ("20") in the total score ("100"). - The five sub-indicators are: 1. Enhancements to out-of-court debt restructuring 2. Hybrid restructuring 3. Reorganization 4. Liquidation 5. Institutional framework - Grading of each aspect follows the ROSC methodology (4 grades: "0–25"; "25–50"; "50–75"; and "75–100"), producing a numerical value for each sub-indicator. - The analysis is based on the legal and institutional status of all surveyed countries by "July 1, 2021". ### Sub-indicator 1 — Enhancements to Out-of-Court Debt Restructuring - Rationale: Out-of-court restructuring is the standard response in corporate debt crises because it is less costly, more efficient, and scalable, especially where judicial capacity is limited. - Core framework elements (jointly produce "55 percent" of the sub-indicator): - Guidelines or codes of best practice (debt restructuring principles, e.g., “London Approach”, INSOL Principles) — can reach a maximum of "30 percent". - Master restructuring agreements — can reach a maximum of "45 percent". - Administrative restructuring schemes — can reach a maximum of "50 percent". - The maximum score of "55 percent" (or "11 points out of 100") can only be achieved by a combination of these elements. - Auxiliary elements (remaining "45 percent" of the sub-indicator; each element "15 percent"): - Enabling environment for restructuring: - Functional debt enforcement regime that pushes debtors to negotiate — "6 percent". - Tax rules that do not penalize debt restructurings and debt reductions — "3 percent". - Absence of threat of civil or criminal liability for bank/public officials granting concessions; avoiding strict liability on directors that discourages out-of-court restructuring — "3 percent". - Regulatory incentives for restructuring agreements — "3 percent". - Support for SME restructuring: existence of legal, business, financial advice and financial support programs for SMEs. - Alternative dispute resolution (ADR) techniques: availability and regulation of mediation, arbitration, conciliation; applicability to creditor-debtor and inter-creditor disputes; higher score if embedded in existing debt restructuring mechanisms. ### Sub-indicator 2 — Hybrid Restructuring - Rationale: Hybrid restructuring (limited judicial intervention assisting out-of-court restructuring) is important in crises to enable speedy restructuring of many firms while minimizing judicial resource use. - Elements and scoring: - Pre-packaged insolvency (swift court confirmation of negotiated plan): may reach up to "75 percent" of the sub-indicator ("15 points"). - Stay to facilitate negotiations (court-granted stay on creditor actions to support negotiations): "25 percent" of the sub-indicator ("5 points"). - Hybrid/pre-insolvency/preventive procedures (combine stay and confirmation features): can reach at best "90 percent" of the hybrid restructuring score ("18 points"). - Note: Elements can co-exist and be complementary; improper design of pre-insolvency procedures risks reverting to the complexity and delay of full judicial reorganizations. ### Sub-indicator 3 — Reorganization - Rationale: Reorganization preserves firms with high going-concern value; key in corporate debt crises. - Composition: Six elements with equal weight ("1/6" each) toward this sub-indicator: - Debtor-in-possession management: leaves debtor in possession (optionally under an insolvency professional/examiner) to reduce institutional resource use and incentivize early action. - Stay of creditor actions: comprehensive stay applicable to unsecured, preferential, and secured creditors, balanced with protections for secured creditors (ability to request lifting of stay or automatic lifting after a period). - Treatment of executory contracts: ability to maintain essential contracts and disclaim loss-generating contracts, with damages as ordinary unsecured claims. - Post-petition finance (DIP finance): rules to facilitate new financing with priority and protections; priming liens where no free assets exist, balanced with safeguards for existing secured creditors. - Mechanisms and safeguards for approval of reorganization plans: majority-binding mechanisms; class voting, cram-down with best interests of creditors’ test and absolute priority rule as safeguards. - Simplified reorganization for micro and small enterprises: low-cost procedures reducing time and costs to increase access for micro and small enterprises. ### Sub-indicator 4 — Liquidation - Rationale: Liquidation reallocates assets to productive uses and minimizes creditor losses when firms are nonviable; relevant during crises causing structural sectoral change. - Four elements, each accounting for "25 percent" of the sub-indicator: - Effectiveness and procedural simplicity: decoupling sale of assets from claim verification; minimizing court intervention; empowering liquidator to act swiftly. - Sale of businesses as a going concern: short stay of creditor actions to enable sale of whole business or productive units; alternative is piecemeal sale (last resort). - Sale of collateral: after short stay, secured creditors should be able to sell collateral without further delay, ensuring protection of insolvency estate interests. - Technology and flexibility in liquidation: use of digital technology (e-auctions, dedicated portals, e-advertising) and flexible sale methods (private sales, credit-bids, attributing ownership to creditors) to increase efficiency and reduce fraud/collusion. ### Sub-indicator 5 — Institutional Framework - Rationale: Institutional capacity and features indirectly influence restructuring outcomes; this sub-indicator assesses aspects particularly useful in crises. - Four elements with assigned weights: - Role of the courts: "30 percent" of the sub-indicator; emphasis on judge specialization in insolvency or commercial law and system flexibility to create and fill new judge positions quickly. - Second element: "25 percent". - Third element: "25 percent". - Support professionals: "20 percent"; availability, regulation, qualifications, and supervision of accountants, lawyers, appraisers and other professionals who support insolvency processes. - Specific institutional factors described: - Specialized courts or specialized benches in major commercial districts; alternative is judge specialization in commercial cases. - Use of technology at the courts: electronic case management, e-filing, e-notices, data collection, publishing insolvency information, remote hearings, and electronic creditor voting. - Regulation of the insolvency profession: qualifications and integrity safeguards for insolvency administrators to optimize system capacity and allow judiciary to focus on disputes and oversight. - Support professionals ecosystem: regulated, qualified, supervised availability of accountants, lawyers, appraisers to support insolvency operations. *Source: Annex 3. Indicator for Crisis, “Preparedness of Insolvency Systems,” IMF Departmental Paper (legal and institutional status of surveyed countries by July 1, 2021).* ### Annex Table 3.1. Indicator for Crisis Preparedness of Insolvency Systems ### Annex Table 3.1. Indicator for Crisis Preparedness of Insolvency Systems ### Country indicators (component scores and total) - Argentina: Enhancements to Out-of-Court Debt Restructuring 9.0; Hybrid Restructuring 11.0; Reorganization 9.1; Liquidation 9.0; Institutional Framework 11.0; Total 49.1 - Australia: Enhancements to Out-of-Court Debt Restructuring 14.5; Hybrid Restructuring 15.0; Reorganization 10.1; Liquidation 15.0; Institutional Framework 16.0; Total 70.6 - Austria: Enhancements to Out-of-Court Debt Restructuring 9.0; Hybrid Restructuring 18.0; Reorganization 14.1; Liquidation 12.0; Institutional Framework 14.0; Total 67.1 - Bangladesh: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 7.0; Reorganization 2.5; Liquidation 5.0; Institutional Framework 7.0; Total 26.5 - Belgium: Enhancements to Out-of-Court Debt Restructuring 13.0; Hybrid Restructuring 10.0; Reorganization 12.6; Liquidation 14.0; Institutional Framework 12.0; Total 61.6 - Brazil: Enhancements to Out-of-Court Debt Restructuring 8.0; Hybrid Restructuring 14.0; Reorganization 14.0; Liquidation 12.0; Institutional Framework 9.0; Total 57.0 - Cambodia: Enhancements to Out-of-Court Debt Restructuring 3.0; Hybrid Restructuring 0.0; Reorganization 10.0; Liquidation 7.5; Institutional Framework 4.5; Total 25.0 - Cameroon: Enhancements to Out-of-Court Debt Restructuring 5.5; Hybrid Restructuring 9.0; Reorganization 8.5; Liquidation 6.5; Institutional Framework 5.0; Total 34.5 - Canada: Enhancements to Out-of-Court Debt Restructuring 10.5; Hybrid Restructuring 15.0; Reorganization 14.0; Liquidation 16.0; Institutional Framework 17.0; Total 72.5 - Chile: Enhancements to Out-of-Court Debt Restructuring 7.0; Hybrid Restructuring 10.0; Reorganization 10.0; Liquidation 9.5; Institutional Framework 15.5; Total 52.0 - China: Enhancements to Out-of-Court Debt Restructuring 9.5; Hybrid Restructuring 13.5; Reorganization 13.0; Liquidation 9.0; Institutional Framework 13.5; Total 58.5 - Colombia: Enhancements to Out-of-Court Debt Restructuring 14.0; Hybrid Restructuring 15.0; Reorganization 14.9; Liquidation 12.5; Institutional Framework 13.5; Total 69.9 - Congo, Rep. of: Enhancements to Out-of-Court Debt Restructuring 6.0; Hybrid Restructuring 9.0; Reorganization 8.5; Liquidation 6.5; Institutional Framework 4.0; Total 34.0 - Egypt: Enhancements to Out-of-Court Debt Restructuring 9.0; Hybrid Restructuring 9.0; Reorganization 8.6; Liquidation 8.5; Institutional Framework 7.0; Total 42.1 - France: Enhancements to Out-of-Court Debt Restructuring 15.5; Hybrid Restructuring 18.0; Reorganization 12.1; Liquidation 12.5; Institutional Framework 17.0; Total 75.1 - Germany: Enhancements to Out-of-Court Debt Restructuring 14.5; Hybrid Restructuring 18.0; Reorganization 16.3; Liquidation 13.5; Institutional Framework 14.0; Total 76.3 - Ghana: Enhancements to Out-of-Court Debt Restructuring 6.0; Hybrid Restructuring 7.0; Reorganization 4.0; Liquidation 8.0; Institutional Framework 7.5; Total 32.5 - Haiti: Enhancements to Out-of-Court Debt Restructuring 4.5; Hybrid Restructuring 0.0; Reorganization 1.0; Liquidation 2.0; Institutional Framework 3.5; Total 11.0 - Honduras: Enhancements to Out-of-Court Debt Restructuring 7.0; Hybrid Restructuring 0.0; Reorganization 7.8; Liquidation 8.0; Institutional Framework 4.0; Total 26.8 - India: Enhancements to Out-of-Court Debt Restructuring 11.5; Hybrid Restructuring 7.0; Reorganization 8.3; Liquidation 13.5; Institutional Framework 11.5; Total 51.8 - Indonesia: Enhancements to Out-of-Court Debt Restructuring 7.5; Hybrid Restructuring 9.0; Reorganization 8.3; Liquidation 8.5; Institutional Framework 9.5; Total 42.8 - Iran: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 0.0; Reorganization 1.0; Liquidation 3.0; Institutional Framework 5.0; Total 14.0 - Ireland: Enhancements to Out-of-Court Debt Restructuring 10.0; Hybrid Restructuring 14.0; Reorganization 14.1; Liquidation 14.5; Institutional Framework 12.5; Total 65.1 - Israel: Enhancements to Out-of-Court Debt Restructuring 7.0; Hybrid Restructuring 14.0; Reorganization 11.3; Liquidation 10.0; Institutional Framework 12.5; Total 54.8 - Italy: Enhancements to Out-of-Court Debt Restructuring 11.0; Hybrid Restructuring 15.0; Reorganization 13.6; Liquidation 13.0; Institutional Framework 13.0; Total 65.6 - Japan: Enhancements to Out-of-Court Debt Restructuring 17.0; Hybrid Restructuring 10.0; Reorganization 14.5; Liquidation 15.0; Institutional Framework 15.0; Total 71.5 - Jordan: Enhancements to Out-of-Court Debt Restructuring 9.0; Hybrid Restructuring 0.0; Reorganization 10.1; Liquidation 6.0; Institutional Framework 7.5; Total 32.6 - Kenya: Enhancements to Out-of-Court Debt Restructuring 7.5; Hybrid Restructuring 11.0; Reorganization 8.5; Liquidation 9.0; Institutional Framework 9.0; Total 45.0 - Korea: Enhancements to Out-of-Court Debt Restructuring 19.0; Hybrid Restructuring 16.0; Reorganization 20.0; Liquidation 13.0; Institutional Framework 16.0; Total 84.0 - Kyrgyz Rep.: Enhancements to Out-of-Court Debt Restructuring 11.0; Hybrid Restructuring 10.0; Reorganization 6.3; Liquidation 9.0; Institutional Framework 7.5; Total 43.8 - Malaysia: Enhancements to Out-of-Court Debt Restructuring 18.0; Hybrid Restructuring 15.0; Reorganization 2.5; Liquidation 15.0; Institutional Framework 12.5; Total 63.0 - Mexico: Enhancements to Out-of-Court Debt Restructuring 6.0; Hybrid Restructuring 8.0; Reorganization 10.1; Liquidation 8.5; Institutional Framework 8.5; Total 41.1 - Myanmar: Enhancements to Out-of-Court Debt Restructuring 3.0; Hybrid Restructuring 7.0; Reorganization 11.8; Liquidation 6.5; Institutional Framework 4.5; Total 32.8 - The Netherlands: Enhancements to Out-of-Court Debt Restructuring 6.5; Hybrid Restructuring 18.0; Reorganization 12.0; Liquidation 13.5; Institutional Framework 12.0; Total 62.0 - New Zealand: Enhancements to Out-of-Court Debt Restructuring 12.5; Hybrid Restructuring 12.0; Reorganization 5.8; Liquidation 13.0; Institutional Framework 13.0; Total 56.3 - Nicaragua: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 0.0; Reorganization 2.0; Liquidation 6.5; Institutional Framework 5.0; Total 18.5 - Nigeria: Enhancements to Out-of-Court Debt Restructuring 6.5; Hybrid Restructuring 4.0; Reorganization 2.5; Liquidation 8.5; Institutional Framework 4.0; Total 25.5 - Norway: Enhancements to Out-of-Court Debt Restructuring 11.0; Hybrid Restructuring 0.0; Reorganization 11.6; Liquidation 13.5; Institutional Framework 15.0; Total 51.1 - Pakistan: Enhancements to Out-of-Court Debt Restructuring 4.5; Hybrid Restructuring 7.0; Reorganization 10.3; Liquidation 11.0; Institutional Framework 9.0; Total 41.8 - Papua New Guinea: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 9.0; Reorganization 5.0; Liquidation 8.0; Institutional Framework 5.0; Total 32.0 - Philippines: Enhancements to Out-of-Court Debt Restructuring 14.5; Hybrid Restructuring 12.0; Reorganization 14.5; Liquidation 8.0; Institutional Framework 10.0; Total 59.0 - Poland: Enhancements to Out-of-Court Debt Restructuring 9.5; Hybrid Restructuring 13.0; Reorganization 9.5; Liquidation 12.5; Institutional Framework 10.0; Total 54.5 - Russia: Enhancements to Out-of-Court Debt Restructuring 6.5; Hybrid Restructuring 2.0; Reorganization 13.5; Liquidation 12.5; Institutional Framework 13.5; Total 48.0 - Rwanda: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 11.5; Reorganization 11.6; Liquidation 9.5; Institutional Framework 10.0; Total 47.6 - Saudi Arabia: Enhancements to Out-of-Court Debt Restructuring 3.5; Hybrid Restructuring 13.0; Reorganization 8.8; Liquidation 3.0; Institutional Framework 14.0; Total 42.3 - Singapore: Enhancements to Out-of-Court Debt Restructuring 12.5; Hybrid Restructuring 16.0; Reorganization 14.3; Liquidation 13.0; Institutional Framework 18.0; Total 73.8 - South Africa: Enhancements to Out-of-Court Debt Restructuring 8.5; Hybrid Restructuring 9.0; Reorganization 9.6; Liquidation 10.0; Institutional Framework 11.5; Total 48.6 - Spain: Enhancements to Out-of-Court Debt Restructuring 12.5; Hybrid Restructuring 16.0; Reorganization 11.3; Liquidation 14.0; Institutional Framework 13.5; Total 67.3 - Sri Lanka: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 7.0; Reorganization 4.5; Liquidation 11.5; Institutional Framework 7.0; Total 35.0 - Sweden: Enhancements to Out-of-Court Debt Restructuring 11.0; Hybrid Restructuring 0.0; Reorganization 11.5; Liquidation 16.5; Institutional Framework 13.0; Total 52.0 - Switzerland: Enhancements to Out-of-Court Debt Restructuring 10.0; Hybrid Restructuring 10.0; Reorganization 11.8; Liquidation 8.5; Institutional Framework 12.0; Total 52.3 - Tajikistan: Enhancements to Out-of-Court Debt Restructuring 4.5; Hybrid Restructuring 0.0; Reorganization 6.5; Liquidation 6.5; Institutional Framework 4.5; Total 22.0 - Tanzania: Enhancements to Out-of-Court Debt Restructuring 5.0; Hybrid Restructuring 7.0; Reorganization 5.0; Liquidation 8.0; Institutional Framework 6.0; Total 31.0 - Thailand: Enhancements to Out-of-Court Debt Restructuring 10.0; Hybrid Restructuring 5.0; Reorganization 15.2; Liquidation 10.0; Institutional Framework 13.5; Total 53.7 - Turkey: Enhancements to Out-of-Court Debt Restructuring 16.5; Hybrid Restructuring 0.0; Reorganization 6.5; Liquidation 9.0; Institutional Framework 12.5; Total 44.5 - United Kingdom: Enhancements to Out-of-Court Debt Restructuring 17.5; Hybrid Restructuring 18.0; Reorganization 8.0; Liquidation 17.0; Institutional Framework 18.5; Total 79.0 - United States: Enhancements to Out-of-Court Debt Restructuring 11.0; Hybrid Restructuring 13.0; Reorganization 13.0; Liquidation 6.0; Institutional Framework 14.0; Total 57.0 - United Arab Emirates: Enhancements to Out-of-Court Debt Restructuring 10.5; Hybrid Restructuring 15.0; Reorganization 20.0; Liquidation 18.0; Institutional Framework 18.0; Total 81.5 - Venezuela: Enhancements to Out-of-Court Debt Restructuring 4.5; Hybrid Restructuring 0.0; Reorganization 2.0; Liquidation 6.0; Institutional Framework 5.0; Total 17.5 - Vietnam: Enhancements to Out-of-Court Debt Restructuring 8.0; Hybrid Restructuring 0.0; Reorganization 5.0; Liquidation 5.0; Institutional Framework 5.0; Total 23.0 ### Key observations from the table - Highest total scores include Korea 84.0; United Arab Emirates 81.5; United Kingdom 79.0; Germany 76.3; France 75.1. - Several jurisdictions show 0.0 in the Hybrid Restructuring component (examples: Cambodia 0.0; Haiti 0.0; Honduras 0.0; Iran 0.0; Jordan 0.0; Norway 0.0; Nicaragua 0.0; Tajikistan 0.0; Turkey 0.0; Venezuela 0.0; Vietnam 0.0). - Component score ranges are heterogeneous across countries, reflecting differing strengths in Enhancements to Out-of-Court Debt Restructuring, Hybrid Restructuring, Reorganization, Liquidation, and Institutional Framework. *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis — Annex Table 3.1.* ### Chapter 11, which combined the most ### Chapter 11, which combined the most ### Summary finding - Combining the most attractive features of both methods led to rapid management down of much corporate debt that defaulted during the crisis, averted “mass liquidations,” and enabled corporate profits, balance sheets, and values to rebound with remarkable speed. ### Out-of-court restructuring frameworks (selected country experiences) - Portugal (2012) - Formal out-of-court restructuring regime tailored to SMEs through mediation by a government agency. - Featured a creditor standstill and required tax and social security authorities to participate. - Agreement bound only participating creditors; no majority voting for binding dissenters in the initial description. - Spain (2013; reformed 2015) - Time-bound, out-of-court agreement for micro and small enterprises. - Chamber of commerce or a mediator appointed by the registrar or a notary leads negotiations. - Stay on enforcement actions in effect for three months (except public creditors). - Payments could not be postponed for more than 10 years; debts could be totally written down or converted into equity. - A 60 percent or 75 percent majority of creditors (in value) required to approve and extend the plan to dissenting or nonparticipating creditors (60 percent for stays up to five years and 75 percent for other operations). - Majorities increased up to 65 percent and 80 percent for secured creditors (just for the part of the credit covered by the guarantee). - Italy (2012) - Out-of-court procedure for SMEs where an independent expert appointed by the debtor could facilitate an agreement; agreement binds only participating creditors. - Greece (2014) - Out-of-court framework enabling reduction of SME debt according to economic indicators. - Corresponding tax credit for creditors and restructuring of public creditors’ claims according to installment schemes for public claims (with an extra 20 percent benefit). - Ireland - Resolution of SME NPLs guided by lender-specific workout targets; two main SME lenders expected to complete workout plans of almost all SME loans by end -2014. ### Turkey (2018) — master restructuring agreement / framework agreement - Framework agreement signed by main Turkish credit institutions and published through the Bank Association of Turkey; foreign credit institutions may sign voluntarily. - Key features: - Standstill to avoid enforcement action. - Committee of main financial creditors; the bank with largest exposure acts as lead creditor. - Fixed negotiation term typically 90 days, extendable for another 90 days. - Master restructuring agreement binds creditors, enabling workouts without unanimity. - Majority of two-thirds of the claims sufficient to approve a workout; majority increases to 90 percent if workout includes measures such as an interest rate reduction below 75 percent of market levels. - Writing down principal, converting debts into equity, or collecting debt in kind requires unanimity. - Restructuring can cover a whole group of companies. - Disputes settled by an arbitration committee. - Large corporate agreement (financial debt more than 100 million TRY) complemented by a small-scale version for SMEs. - Small-scale version limits options: no debt/equity conversion or write down of principal; parameters on grace periods and interest rates. - Penalties/incentives and fresh funds: - Restructuring ends if financial creditors representing 25 percent of the claims take legal action against the debtor. - Restructuring agreements connected with forbearance measures adopted by the bank supervisor. - Advance of new money is contemplated in the framework agreement: it requires the support of at least two banks representing 90 percent of claims. - No provision of new funds in the small-scale restructuring agreement. ### Malaysia — Corporate Debt Restructuring Committee (CDRC) - CDRC set up by Malaysian government under Bank Negara Malaysia; established during the Asian financial crisis, re-established as a preventive measure during the GFC and remained active. - CDRC provides procedural guidelines and a code of conduct (last modified in 2020); acts as mediator. - Decision rule: decisions affecting the procedure must be taken by creditors representing at least 75 percent of each creditor class. - Eligibility criteria for companies seeking restructuring: 1) aggregate indebtedness of RM10 million or more 2) at least 2 financial creditors 3) not in receivership or liquidation 4) experiencing difficulties in servicing their debt obligations but may not have already defaulted 5) Alternatively, the company is listed in the stock market. - Process and timing: - A creditors’ committee is formed for each case. - CDRC conducts a viability assessment. - All creditors observe a standstill while the debtor prepares a workout proposal within a 60-day period. - Restructuring agreement contents are flexible and must be accepted by a 75 percent majority in each creditor class. - Penalties/incentives and fresh funds: - CDRC can warn participants for noncompliance and dismiss the case if the debtor does not comply with the procedure. - New money provided to sustain viability shall be accorded a senior ranking status. ### Republic of Korea — Corporate Promotion Restructuring Act (CRPA, 2001) - CRPA codifies workout practices, includes guidelines for negotiation and prevention of holdout behavior; applied to financial creditors holding claims against companies. - Two tracks: large companies and SMEs. - Lead bank assesses credit risk; if at risk of failure, lead bank management or joint management by creditor committee may be initiated. - Committee process: - Lead creditor calls meeting, works on restructuring plan; an expert typically conducts business analysis and assists in formulating plan. - Plan adopted by creditors holding three-quarters of the financial claims. - If a single creditor holds that percentage, then it is also required that two-fifth of the number of financial creditors agree with the plan. - Once approved by creditors, debtor and creditors sign a memorandum of understanding for implementation. - Disputes submitted to mediation of another committee of financial creditors. - Penalties/incentives and fresh funds: - A creditor objecting to measures such as a debt/equity swap, reduction of interest or principal, or extension of new credit can ask other creditors to acquire its claims, calculated at the value to be recovered in a liquidation. - New credit can be extended. - Objecting creditors can ask other creditors to acquire their claims. - Creditors may have to pay penalties if they don’t provide new credit after a majority decision. ### Japan — Act on Strengthening Industrial Competitiveness (ASIC 2013) and REVIC - ASIC (2013) supports coordination between debtors and financial creditors with support of independent experts (Japanese Association of Turnaround Professionals). - Regional Economy Vitalization Company (established 2009) specializes in providing support and facilitating workouts, including financing for restructuring. - Penalties/incentives and fresh funds: - There are tax incentives for debtors and creditors. - REVIC provides financing for restructuring companies. *IMF DEPARTMENTAL PAPERS • Policy Options for Supporting and Restructuring Firms Hit By the COVID-19 Crisis* ### Annex Table 4.2. Asset Management Companies (AMCs) ### Annex Table 4.2. Asset Management Companies (AMCs) ### Republic of Korea (1997) - Source: Calomiris and others (2003) - Mandate: - The Korean government established an asset management company called Korean Asset Management Corporation (KAMCO) to improve banks’ condition and accelerate debt resolution. - During 1997 and 1998, KAMCO acquired thousands of individual assets, mainly operating and closed factories and commercial real estate. - Total loans acquired amounted to KRW110.1 trillion, with NPLs of KRW39.8 trillion. These loans represented 14.7 percent of bank loans. - Assets were initially acquired at above-market prices, but eventually at approximate market prices. On average, the transfer price had a 64% discount from face value. - Strengths/weaknesses: - KAMCO played a smaller role in corporate restructuring (except in the case of Daewoo). - The Korean judicial framework offers better protection for creditors and better enforcement capacity than that of Mexico in the mid-1990s. - The real estate assets transferred to KAMCO were easier to liquidate because they were less subject to political interference. - Outcome: - Despite a slow start, unlike FOBAPROA, KAMCO’s disposition was rapid. - Within roughly two years, KAMCO had resolved KRW64.6 trillion of NPLs, which represented 60 percent of its total acquisitions, and had recovered KRW30.3 trillion, which represented 76 percent of the total amount spent to purchase the NPLs. - More than 70 percent of the remaining KRW45.5 trillion loans were related to Daewoo which required more time-consuming methods for liquidation. ### Mexico (1994) - Source: Calomiris and others (2003) - Mandate: - Mexico’s FOBAPROA was originally created in 1990 as a deposit guarantee agency. FOBAPROA’s mandate was broadened as a result of the banking crisis in 1996 beyond deposit insurance responsibilities to make it a bank rescue and intervention agency as well as an asset management company. - FOBAPROA purchased loans at book value (not market value) from banks to recapitalize them in exchange for 10-year nontransferable zero-coupon government bonds. - Interest payments, based on domestic treasury rates, were payable at maturity. - As a condition for participating in this program, bank shareholders injected one peso of new capital into the bank for every two pesos of bad loans to the FOBAPROA trust. - Banks were also required to set aside reserves valued at around 25 percent of the total debt transferred, but they could not profit from the transaction because the bonds were not tradable. - In late 1996, the Valuacion y Venta de Activos (VVA) was created as a supporting agent in the sale of FOBAPROA’s assets. - In June 1997, the resolution activities of the VVA and FOBAPROA were merged into a single agency, the Direccion de Activos Corporativos (DAC), which became the sole agency overseeing corporate asset recovery. - Strengths/weaknesses: - Mexico’s supervisory authority lacked credibility and enforcement capacity to encourage financial institutions to clean up the remainder of their balance sheets, and operational restructuring of financial institutions was limited as management was left unchanged. - The VVA’s activities were hindered by obstacles: - Initially the government restricted financial institutions including the VVA from foreclosing on assets – the VVA could not directly sell the loans acquired by FOBAPROA because the selling bank remained the loan’s legal owner and kept a 25 percent stake in the recovery. - The sheer size of impaired assets made it difficult to restructure debt and sell assets. - The large scale and the type of assets transferred to FOBAPROA, that is, corporate and politically connected loans, were difficult to resolve for a government-agency susceptible to political pressure. - The asset transfer was a non-transparent and repeated process that led to perceptions that some banks received more favorable treatment than others. - VVA’s due diligence process was complex and lengthy, as the documentation of loans remained with the banks that administered or held the loans. - The responsibilities of the VVA and FOBAPROA were poorly defined, complicating the relationship between the two agencies. - DAC experienced problems in selling off assets for some of the same problems as faced by its predecessor, including the absence of a secondary market, politically connected loans, and substantial deficiencies in the bankruptcy and foreclosure code that limited DAC’s ability to bring debtors to the negotiation table. - Outcome: - The Loan Purchase and Recapitalization Program improved liquidity and capital adequacy ratios of most banks, but failed to achieve its main objectives of restoring bank stability and fostering corporate restructuring. - The scope of the program was not sufficient for the system’s recapitalization needs, necessitating the inclusion of additional resources. Seven out of the 12 banks that participated in this program continued to require additional reserves and capital. - Banks’ returns on assets, while improving somewhat after a sharp deterioration in 1996, remained at a low level despite the removal of a massive amount of bad loans from the system. - Past due loans continued to increase in intervened banks even as bad loans were taken off banks’ balance sheets. - Only when the government sold the majority of institutions to foreigners after 1996 did the financial condition of banks improve. - The FOBAPROA program failed at asset resolution. In total, DAC oversaw the recovery of US$16 billion assets, representing 28,000 loans from more than 4,000 companies. - By 2003, only 0.5 percent of the total assets transferred under the FOBAPROA program had been sold, with an average asset recovery rate of only 15 percent (IMF 2001). - The FOBAPROA program did not reinvigorate the banking sector. Credit to the private sector fell considerably from about US$60 billion at end-1996 to around US$25 billion at end-1998 (McQuerry 1999). - As a share of GDP, private credit dropped from 39 percent at end-1994 to 19 percent at end-1998, and to 11 percent at end-2001. - Overall, the bailout of the banking sector in Mexico through loan purchases and recapitalizations failed to improve the sector’s financial viability or its financial intermediation capacity. The transfer of more than $30 billion in bad loan portfolios off bank balance sheets had little effect in addressing fundamental problems in the banking sector. Past due loans remained very high, and bank capitalization levels were still considered inadequate after four years of bank rescue programs. ### Malaysia (1997) - Source: Zainal and Putih (2005) - Mandate: - Danaharta was established in June 1998 with two objectives: to remove nonperforming loans from the banking system and to maximize the value recovered from the nonperforming loans. - The parliament of Malaysia approved the Danaharta Act, which gave Danaharta special powers to deal with nonperforming loans. - Bank Negara Malaysia began developing a deposit insurance scheme for the banking system. - Danamodal Nasional Berhad was set up to recapitalize the banking sector where necessary. - A bank in trouble because of huge amount of bad loans in its books would see Danaharta to sell its nonperforming loans. If the bank was still in a bad financial position and the shareholders could not recapitalize, the bank would seek financial assistance from Danamodal, at a cost. - Banks were required to sell “excess” nonperforming loans to Danaharta. - Danaharta, Danamodal, and CDRC were coordinated via a steering committee chaired by the governor of Bank Negara Malaysia. - Strengths/weaknesses: - Under the Danaharta Act, Danaharta could acquire nonperforming loans from banks via statutory vesting, which sped up the transfer process. - Danaharta had the ability to foreclose on property collateral without going through the court process, significantly reducing time and costs. - Danaharta could appoint a special administrator over a company that could not settle its debts with Danaharta; the special administrator had full control and responsibility over the assets and affairs of the company and was required to prepare a workout proposal. - Danaharta purchased loans with face values of M$5 million or more at discounted prices based on the value of the underlying collateral. In the case of unsecured loans, Danaharta paid the bank a price equivalent to 10 percent of the loan amount outstanding. - There was no compulsory acquisition of loans; all transactions were conducted at arm’s length on a “willing buyer, willing seller” basis. - Danaharta agreed to a profit-sharing scheme for recovering nonperforming loans over and above Danaharta’s purchase and holding costs with the selling bank (80 percent for the bank; 20 percent for Danaharta). - As payment for these acquisitions, Danaharta issued government-guaranteed zero-coupon bonds to the banks. - Once vested with Danaharta, recovery strategies ranged from loan restructuring for viable enterprises to foreclosure or legal action for non-viable borrowers. - Proceeds from recovery were to be used mainly to redeem Danaharta zero-coupon bonds. - Outcome: - Danaharta completed its primary acquisition of loans by June 1999, six months ahead of schedule. - The statutory vesting, foreclosure powers, and special administration tools significantly reduced time and costs involved in recovering nonperforming loans. ### Indonesia (1997) - Source: Calomiris and others (2003) - Mandate: - The Indonesian government set up the Indonesian Bank Restructuring Agency (IBRA) with responsibilities including restructuring of banks transferred to it, recovery and restructuring of bank assets (including both physical assets and loans), and recovery of state funds formerly disbursed to the banking sector. - IBRA’s strategy toward debt restructuring focused on the largest debtors, while outsourcing or selling small- and medium-sized loans. - Smaller retail and SME loans were sold through open auctions, medium-sized commercial loans were outsourced in batches to servicing agents through a competitive bidding process. - For the largest corporate debtors, the approach focused on restructuring cooperative debtors, taking legal action against noncooperative debtors, and selling restructured loans through a competitive bidding system. Later, there was a shift toward direct loan sales at discounts (IMF 2000). - On February 14, 1998, IBRA took over the surveillance of 54 banks, including 4 state banks and regional development banks that had borrowed from Bank Indonesia more than 200 percent of their capital and had a capital adequacy ratio below 5 percent. They represented 36.7 percent of total system assets. The majority of the nonperforming loans were transferred from the state banks. Seven of the 54 intervened banks were the largest borrowers from Bank Indonesia, accounting together for more than 75 percent of the total Bank Indonesia liquidity support. - Strengths/weaknesses: - Loans were transferred at book value, which created incentives for IBRA to hold, rather than dispose of, the assets to avoid recognition of the loss. - IBRA’s success was mixed; loan disposal rate only started to improve once the agency shifted to selling loans at a steep discount. - The agency’s activities were impeded by a weak judicial framework and weak enforcement mechanisms, the type of assets transferred (mostly corporate loans from state banks), and the large amount of assets transferred (IBRA controlled over a third of total system assets at one point in time). - Outcome: - Mixed results; improvement in loan disposal only after policy shift to steep discounts. ### Slovenia (2011) - Source: Nye (2021) - Mandate: - The government announced a public asset management company called the Bank Assets Management Company (BAMC or DUTB) in late 2012. The AMC would take over and manage banks’ NPLs for five years, after which it would transfer any remaining assets to a Slovenian government holding company. - The asset transfers would be coordinated with €3.2 billion in capital injections at the participating banks. An additional €190 million in capital was injected in 2014. - Strengths/weaknesses: - The government established the BAMC on March 19, 2013, but the organization did not begin taking assets off the balance sheets of Slovenia’s large government-controlled banks until December 20, 2013 because the BAMC had to delay its purchases until the European Banking Authority released Slovenia’s stress-test results in December 2013. - The BAMC was charged not just with managing bad assets, but also with restructuring distressed corporate borrowers, which contributed to governance problems. - Outcome: - The BAMC went on to purchase assets with a total face value of €5.8 billion for €2.0 billion by the end of 2016. - Slovenia had to extend the BAMC’s lifetime to 2022 to complete the disposal of its assets. - The BAMC paid back €1.28 billion of its €1.97 billion in government-guaranteed debts by the end of 2018, contributed €172 million in profits to the government and state-owned banks by the end of 2017, had an equity position of €200 million by the end of 2018, and had €830.1 million in remaining assets by the end of 2018. - The BAMC, in combination with €3.4 billion of government capital injections, is seen as having helped Slovenia avoid an IMF-EU bailout. *Annex Table 4.2. Asset Management Companies (AMCs) — IMF Departmental Papers* ### References ### References ### Listed references - Adalet McGowan, Müge, and Dan Andrews. 2016. “Insolvency Regimes and Productivity growth: A Framework for Analysis.” OECD Economics Department Working Papers, No. 1309, OECD Publishing, Paris. - Adalet McGowan, Müge, Dan Andrews, and Valentine Millot. 2017. “Insolvency Regimes, Zombie Firms and Capital Reallocation.” OECD Economics Department Working Papers, No. 1399, OECD Publishing, Paris. - Adalet McGowan, Müge, Dan Andrews, and Valentine Millot. 2018. “The Walking Dead? Zombie Firms and Productivity Performance in OECD Countries.” Economic Policy 33 (96): 685–736. - Aiyar, Shekhar, Wolfgang Bergthaler, Jose M. Garrido, Anna Ilyina, Andreas Jobst, Kenneth Kang, Dmitriy Kovtun, Yan Liu, Dermot Monaghan, and Marina Moretti. 2015. “A Strategy for Resolving Europe’s Problem Loans.” IMF Staff Discussion Note 15/19, International Monetary Fund, Washington, DC. - Allianz Research. 2021. “Global Insolvencies: We’ll be back.” Allianz Research – Euler Hermes. - Banerjee, Ryan, and Boris Hofmann. 2018. “The Rise of Zombie Firms: Causes and Consequences.” BIS Quarterly Review, Bank for International Settlements, Basel. - Banerjee, Ryan, and Boris Hofmann. 2020. “Corporate Zombies: Anatomy and Life Cycle.” BIS Quarterly Review, Bank for International Settlements, Basel. - Banerjee, Ryan, Joseph Noss, and Jose M. Vidal Pastor. 2021a. “Liquidity to Solvency: Transition Cancelled or Postponed?” BIS Bulletin, No. 40, Bank for International Settlements, Basel. - Banerjee, Ryan, Enisse Kharroubi, and Ulf Lewrick. 2021b. “Bankruptcies, Unemployment and reallocation from Covid-19.” BIS Bulletin, No. 31, Bank for International Settlements, Basel. - Basel Committee on Banking Supervision (BCBS). 2020. “Measures to Reflect the Impact of Covid-19.” Basel Committee on Banking Supervision, Basel. - Baudino, Patrizia, Diarmuid Murphy, and Jean-Philippe Svoronos. 2020. “The Banking Crisis in Ireland.” BIS FSI Crisis Management Series, No. 2, Bank for International Settlements, Basel. - Bauer, Andreas, Sean Craig, Jose Garrido, Kenneth Kang, Kenichiro Kashiwase, Sung Jin Kim, Yan Liu, Sohrab Rafiq. 2021. “Flattening the Insolvency Curve: Promoting Corporate Restructuring in Asia and the Pacific in the Post-C19 Recovery.” IMF Working Paper 21/16, International Monetary Fund, Washington, DC. - Bergthaler, Wolfgang, Kenneth H. Kang, Yan Liu, and Dermot Monaghan. 2015. “Tackling Small and Medium Sized Enterprise Problem Loans in Europe.” IMF Staff Discussion Note 15/04, International Monetary Fund, Washington, DC. - Bernstein, Shai, Emanuele Colonnelli, and Benjamin Iverson. 2019a. “Asset Allocation in Bankruptcy.” The Journal of Finance 74 (1): 5-53. - Bernstein, Shai, Emanuele Colonnelli, Xavier Giroud, and Benjamin Iverson. 2019b. “Bankruptcy Spillovers.” Journal of Financial Economics 133 (3): 608–33. - Blanchard, Olivier, Thomas Philippon, and Jean Pisani-Ferry. 2020. “A New Policy Toolkit Is Needed as Countries Exit COVID-19 Lockdowns.” PIIE Policy Brief 20-8, Peterson Institute for International Economics, Washington, DC. - Brunnermeier, Markus, and Arvind Krishnamurthy. 2020. “Corporate Debt Overhang and Credit Policy.” Brookings Papers on Economic Activity, Brookings Institution, Washington, DC. - Calomiris, Charles W., Daniela Klingebiel, and Luc Laeven. 2004. “A Taxonomy of Financial Crisis Resolution Mechanisms: Cross-Country Experience.” Policy Research Working Paper 3379, World Bank, Washington, DC. - Casey, Anthony J., 2021. “Bankruptcy & Bailouts; Subsidies & Stimulus: The Government Toolset for Responding to Market Distress.” University of Chicago Legal Forum, European Corporate Governance Institute, Law Working Paper 578/2021, Chicago. - Choi, Woon Gyu, and David Cook. 2012. “Fire Sales and the Financial Accelerator.” Journal of Monetary Economics 59 (4): 336–51. - Claessens, Stijn, Ceyla Pazarbasioglu, Luc Laeven, Marc Dobler, Fabian Valencia, Oana Nedelescu, and Katharine Seal. 2011. “Crisis Management and Resolution: Early Lessons from the Financial Crisis.” IMF Staff Discussion Note 11/05, International Monetary Fund, Washington, DC. - Claessens, Stijn, and Ayhan Kose. 2018. “Frontiers of Macrofinancial Linkages.” BIS Paper No. 95, Bank for International Settlements, Basel. - Das, Dilip K. 2000. “Asian Crisis: Distilling Critical Lessons.” UNCTAD Working Paper No. 152. United Nations Conference on Trade and Development, New York. - Das, Sanjiv R., Darrell Duffie, Nikunj Kapadia, and Leandro Saita. 2007. “Common Failings: How Corporate Defaults are Correlated.” The Journal of Finance 62 (1): 93–117. - Dell’Ariccia, Giovanni, Maria S. Martinez Peria, Deniz Igan, Elsie A. Awadzi, Marc Dobler, and Damiano Sandri. 2018. “Trade-offs in Bank Resolution.” IMF Staff Discussion Note 18/02, International Monetary Fund, Washington, DC. - DeMarzo, Peter, Arvind Krishnamurthy, and Joshua Rauh, 2020. “Debtor-in-Possession Financing Facility (DIPFF) Proposal.” Stanford University Graduate School of Business. Palo Alto. - Diez, Federico, Romain Duval, Jiayue Fan, José Garrido, Sebnem Kalemli-Ozcan, Chiara Maggi, Maria S. Martinez Peria, and Nicola Pierri. 2021. “Insolvency Prospects Among Small-and Medium-Sized Enterprises in Advanced Economies.” IMF Staff Discussion Note 2021/002, International Monetary Fund, Washington, DC. - Ebeke, Christian, Jacques Miniane, Laura Papi, Manasa Patnam, Magnus Saxegaard, Volodymyr Tulin, and Laura Valderrama. 2021. “Solvency Support for Enterprises: Key Considerations and Preliminary Lessons from European Support Programs.” Special Series on COVID-19, International Monetary Fund, Washington, DC. - Financial Stability Board, Basel Committee on Banking Supervision, and International Association of Insurance Supervisors (FSB/BCBS/IAIS) Guidance. 2020. “Guidance by the FSB, BCBS, and IAIS on COVID Related Measures.” Directorate-General for Internal Policies, European Parliament Briefing, November 17, Brussels. - Garrido, Jose. 2012. “Out-of-Court Debt Restructuring.” World Bank, Washington, DC. - Garrido, Jose, Wolfgang Bergthaler, Chanda Delong, Juliet Johnson, Amira Rasekh, and Natalia Stetsenko. 2019. “The Use of Data in Assessing and Designing Insolvency Systems.” IMF Working Paper 19/27, International Monetary Fund, Washington, DC. - Georgieva, Kristalina, and Gita Gopinath. 2020. “Emerging Stronger from the Great Lockdown.” Foreign Policy, September 9. - Gilson, Stuart C. 2012. “Coming Through in a Crisis: How Chapter 11 and the Debt Restructuring Industry are Helping to Revive the U.S. Economy.” Journal of Applied Corporate Finance 24 (4): 23–35. - GOV.UK. 2020. “Bounce Back Loan Scheme.” Department of Business, Energy & Industrial Strategy, London. - Greenwood, Robin, Ben Iverson, and David Thesmar. 2020. “Sizing Up Corporate Restructuring in the COVID Crisis.” Brookings Papers on Economic Activity, Brookings Institution, Washington, DC. - Grigorian, David, and Faezeh Raei. 2010. “Government Involvement in Corporate Debt Restructuring: Case Studies from the Great Recession.” IMF Working Paper 10/260, International Monetary Fund, Washington, DC. - Group of Thirty (G30). 2020. “Reviving and Restructuring the Corporate Sector Post-COVID.” Washington, DC. - Gutierrez, Joaquin, Dermot Monaghan, and Alvaro Piris. 2019. “The Role of Bank Diagnostics in IMF-Supported Programs.” MCM Technical Notes and Manuals 19/04, International Monetary Fund, Washington, DC. - Gutierrez, Joaquin, Dermot Monaghan, and Alvaro Piris. 2019. “The Role of Bank Diagnostics in IMF-Supported Programs.” MCM Technical Notes and Manuals 19/04, International Monetary Fund, Washington, DC. - International Monetary Fund (IMF). 1999. “Orderly and Efficient Insolvency Procedures: Key Issues.” Washington, DC. - International Monetary Fund (IMF). 2000. “Indonesia: Selected Issues.” Washington, DC. - International Monetary Fund (IMF). 2001. “Mexico: Financial System Stability Assessment.” Washington, DC. - International Monetary Fund (IMF). 2011. “Iceland: Sixth Review under the SBA and Proposal for Post-Program Monitoring.” Country Report CR/11/263, Washington, DC. - International Monetary Fund (IMF). 2012. “Iceland: Ex Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement.” Country Report CR/12/91, Washington, DC. - International Monetary Fund (IMF). 2013. “Iceland: Ex Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement.” Country Report CR/12/91, Washington, DC. - International Monetary Fund (IMF). 2019. Global Financial Stability Report. Washington, DC, October. - International Monetary Fund (IMF). 2020a. World Economic Outlook. Washington, DC, October. - International Monetary Fund (IMF). 2020b. World Economic Outlook. Washington, DC, April. - International Monetary Fund (IMF). 2020c. Global Financial Stability Report. Washington, DC, April. - International Monetary Fund (IMF). 2020d. Regional Economic Outlook: Europe. Washington, DC, October. - International Monetary Fund (IMF). 2020e. Global Financial Stability Report. Washington, DC, April. - International Monetary Fund (IMF). 2021a. World Economic Outlook Update. Washington, DC, January. - International Monetary Fund (IMF). 2021b. “Supervisory Actions and Priorities in Response to the COVID-19 Pandemic Crisis.” Washington, DC. - International Monetary Fund (IMF). 2021c. “Global Financial Stability Report.” Washington, DC, April. - Iverson, Benjamin. 2018. “Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts.” Management Science 64 (11): 5370 –94. - Iverson, Benjamin, Jared A. Ellias, and Mark J. Roe. 2020. “Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic.” Harvard Business Law Review (11) : 1– 2 6 . - Jordà, Oscar, Martin Kornejew, Moritz Schularick, and Alan M. Taylor. 2020. “Zombies at Large? Corporate Debt Overhang and the Macroeconomy.” Federal Reserve Bank of San Francisco Working Paper 2020-36, San Francisco. - KfW. 2020. “KfW Schnellkredit 2020.” Frankfurt. - La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny. 1998. “Law and Finance.” Journal of Political Economy 10 6 (6) : 1113 – 5 5 . - Laeven, Luc, and Fabian Valencia. 2020. “Systemic Banking Crises Database II.” IMF Economic Review 68 (2) : 3 07– 61. - Laryea, Thomas. 2010. “Approaches to Corporate Debt Restructuring in the Wake of Financial Crises.” IMF Staff Position Note SPN/10/02, International Monetary Fund, Washington, DC - Lieberman, Ira, Mario Gobbo, William P. Mako, and Ruth L. Neyens. 2005. “Recent International Experiences in the Use of Voluntary Workouts under Distressed Conditions.” Corporate Restructuring: Lessons from Experience, World Bank, Washington DC. - Liu, Yan, Christoph B. Rosenberg. 2013. “Dealing with Private Debt Distress in the Wake of the European Financial Crisis: A Review of the Economics and Legal Toolbox.” IMF Working Paper 13/44, International Monetary Fund, Washington, DC. - Liu, Yan, Jose Garrido, and Chanda DeLong. 2020. “Private Debt Resolution in the Wake of the Pandemic.” Special Series on COVID-19, International Monetary Fund, Washington, DC. - Mako, William. 2005. “Emerging-Market and Crisis Applications for Out-of-Court Workouts: Lessons from East Asia, 1998–2001.” Corporate Restructuring: Lessons from Experience, World Bank, Washington D.C. - McQuerry, Elizabeth. 1999. “The Banking Sector Rescue in Mexico.” Federal Reserve Bank of Atlanta Economic Review, Third Quarter 1999. - Mishkin, Frederic. 1999. “Lessons from the Tequila Crisis.” Journal of Banking and Finance 23 (10): 1521–33. - Moretti, Marina, Marc Dobler, and Alvaro Piris. 2020. “Managing Systemic Banking Crises: New Lessons and Lessons Relearned.” IMF Departmental Paper 20/05. International Monetary Fund, Washington, DC. - Nelmes, John, Sergei Antoshin, Yesim Aydin, Heedon Kang, Roland Meeks, Dermot Monaghan, Antonio Pancorbo, Thomas Piontek, and Thierry Tressel. Forthcoming. “COVID-19 and Corporate-Sector Stress: Macro-financial Implications and Policy Responses” Special Series on COVID-19, International Monetary Fund, Washington, DC. - Nye, Alexander. 2021. “Bank Assets Management Company (BAMC).” The Journal of Financial Crises 3 (2): 665–725. - Ong, Li Lian, and Ceyla Pazarbasioglu. 2013. “Credibility and Crisis Stress Testing.” IMF Working Paper 13/178, International Monetary Fund, Washington, DC. - Organisation for Economic Co-operation and Development, (OECD). 2020. “Start-ups in the Time of COVID-19: Facing the Challenges, Seizing the Opportunities.” OECD Policy Responses to Coronavirus (COVID-19), Paris. - Shleifer, Andrei, and Robert W. Vishny. 2021. “Asset Fire Sales and Credit Easing.” American Economic Review 100 (2): 46–50. - Skeel, David. 2020a. “Bankruptcy and the Coronavirus.” Brookings Economic Studies, Brookings Institution, Washington, DC. - Skeel, David. 2020b. “Bankruptcy and the Coronavirus: Part II.” Brookings Economic Studies, Brookings Institution, Washington, DC. - Tressel, Thierry, and Xiaodan Ding. 2021. “Global Corporate Stress Tests—Impact of the COVID-19 Pandemic and Policy Responses.” IMF Working 21/212, International Monetary Fund, Washington, DC. - United Nations. 2004. “UNCITRAL Legislative Guide on Insolvency Law.” New York. - United States CARES Act. 2020. “CARES Act - Small Business Paycheck Protection Program.” Washington, DC. - US Department of Agriculture (USDA). 2020. “Efforts and Resources to Contain the COVID-19 Pandemic: Loans and Grants.” Washington, DC. - Eriksson von Allmen, Ulric, Phakawa Jeasakul, Heedon Kang, and Purva Khera. 2020. “Macrofinancial Considerations for Assessing the Impact of the COVID-19 Pandemic.” Special Series on COVID-19, International Monetary Fund, Washington, DC. - World Bank. 2021. “Principles for Effective Insolvency and Creditor/Debtor Regimes.” Washington DC. - Zainal, Dató, and Abidin Putih. 2005. “Malaysia’s Experience with Corporate Restructuring.” Corporate Restructuring: Lessons from Experience, World Bank, Washington, DC. *Policy Options for Supporting and Restructuring Firms Hit by the COVID-19 Crisis — Departmental Paper No. DP/2022/002* --- _Source: https://www.imf.org/-/media/files/publications/dp/2022/english/posrfea.pdf_