Expedited Debt Restructuring Mechanisms in Latin America: A Regional Overview
Dr Rodrigo Olivares-Caminal, Assistant Professor, University of Warwick, UK
Upon reviewing trends in domestic insolvency law regimes around the world, one point is strikingly clear: many insolvency laws have recently been amended or are currently under review. One reason is a political reaction to address – for the interests of various parties – the financial and economic cycles which gave rise to some unforgettable crises (e.g. the Asian crisis of 1997, Argentina’s external debt default in 2001 and its banking crisis in 2002, or the more recent US sub-prime mortgage crisis, and the ‘credit crunch’). This review of insolvency laws is also a response to a global impetus focused on avoiding liquidation of troubled companies as well as to the adoption of the United Nation’s Commission on International Trade (UNCITRAL) Model Law on Cross-Border Insolvency.
During the last ten years, Latin America has suffered various financial crises. The most significant are the Mexican peso crisis in 1995, Ecuador’s financial crisis and default on its external debt in 1999, the devaluation of the Brazilian real in 1999, Argentina’s external debt default in 2001 and its banking crisis in 2002, and Uruguay’s banking crisis and debt re-profiling in 2003. Likewise, other financial crises, such as the Asian crisis of 1997 or the Russian crisis of 1998, directly impacted on the region either by deepening recessive periods or contributing to the origination of the crises previously mentioned.
Given this framework, it can be said that Latin America has regularly suffered from economic distress or been faced with global adverse financial scenarios. The external debt episode in Argentina that resulted in an acute financial and economic crisis, championing the biggest default in history, is a clear indicator of the Latin American reality.
Corporations doing business in these countries are not exempt from the turmoil. As stated by Stone, corporate restructuring on a large scale is usually made necessary by a systemic financial crisis, which is defined as a severe disruption of financial markets that, by impairing their ability to function, has large and adverse effects on the economy. Crises do occur and when they occur they are of great magnitude.
Upon a slowdown in the economy, overleveraged companies might be faced with distress scenarios where severe actions should be taken. Depending on the seriousness of the situation, these companies become illiquid or insolvent.
The differences between an illiquid and an insolvent company are quite remarkable. The former could resort to some type of reorganisation procedure to restore its solvency while the latter will have to face liquidation. Although there are different shades of grey as result of the different insolvency laws in Latin America, the liquidation process is straightforward and some general guidelines applicable to the whole region can be drawn. In a liquidation, the court – with the assistance of a liquidator – will dispose of the assets of the insolvent company and will distribute the proceeds among creditors according to their ranking of priority to collect their claims.
On the other hand, an illiquid company can resort to a restructuring procedure in order to obtain debt sustainability by reducing the debt burden in an orderly manner. These restructuring procedures could be performed under the auspices of a court or take place out of court.
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