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					Transparency around exit
costs across Europe
Karin S. Thorburn
Dartmouth College
Objective of bankruptcy

    Restructure economically viable firms
    Terminate unprofitable operations and
     reallocate assets to higher-value use
    Do this as cost-efficiently as possible

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Bankruptcy costs
    Direct costs
       – Lawyers, bankers, court hearings
    Indirect costs
       – Decline in sale, loss of employees, etc.
    Inefficient allocation of assets
       – Continuation versus liquidation
       – Fire sales
    Delayed filing and risk-shifting incentives
    Predictability/transparency of proceedings
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EU insolvency regulation

    Regulation on Insolvency Proceedings
       – Rules for cross-country proceedings
            Main insolvency proceedings in member state
             where firm has its “center of main interest”
            Secondary proceedings in other member
             countries, limited to winding up assets and
             run parallel to main proceedings
       – No harmonization of bankruptcy law
         between different EU countries
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Bankruptcy systems

    Reorganization codes (US, France)
       – Formal framework to renegotiate claims
       – Incumbent management retains control
       – Equityholder friendly
    Auction codes (Sweden, UK)
       – Sale of the firm in a mandatory auction
       – Creditor rights at the forefront

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    Court appoints an administrator
    Objectives are firm continuation, job
     preservation and, third, creditor claims
    Automatic stay, super-priority debt
    Creditors are removed from process
    Tax and employee claims take priority
     to proceeds from secured assets
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    3-month grace period from creditors
    Administrator contrives a
     reorganization plan
    Approval from creditors by majority
    Court may cram down on dissenting
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The UK

    Secured creditor appoints receiver
    Receiver looks after the interests of
     the secured creditor
    Receiver decides whether to
     restructure firm or sell assets
    No automatic stay or super-priority
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    Mandatory auction of firm as a going
     concern or piecemeal
    Automatic stay of debt and super-
     priority financing
    Buyer decides whether to retain
     incumbent management
    Payment in cash
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Reorganization code

    Pros:
       – Encourages management to file early
    Cons:
       – Joint negotiation of firm value, use of
         assets and creditor payoffs risks prolong
         the bankruptcy procedure
       – Inefficient continuations
       – Less transparent
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Auction code

    Pros:
       – Assets are valued by the market
       – Highest bidder decides use of assets
       – Cash allows payoffs following APR
    Cons:
       – Asset fire sales
       – Delayed filing and excessive risk-shifting

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Direct and indirect costs

    Swedish auctions speedy—2 months—
     and relatively low cost (Thorburn 00)
    UK bankruptcy higher direct costs
     (Franks and Sussman 04)
    Lowest debt recovery rates in France,
     highest in UK and Sweden
     (Davydenko-Franks 04, Thorburn 00)

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Inefficient continuation
and liquidation
    France: too much continuations?
    UK, Germany: too many liquidations?
    Sweden: buyer decides, so no real
     distortion of incentives
    Most liquidations in French bankruptcy
     (Kaiser 96, Davydenko-Franks 04)
    Auctioned firms perform well (Eckbo-
     Thorburn 03)
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Asset fire sales

   UK, Sweden: depressed prices?
   Managers repurchase assets in period of
    industry distress (Stromberg 00)
   Secured creditors provide liquidity to
    competing bidders (Eckbo-Thorburn 04)
   Auction prices do not vary with fire-sales
    variables in continuation sales (Eckbo-
    Thorburn 06)
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Delayed filing

    UK, Sweden: excessive risk-shifting?
    France: encourages early filing?
    Managerial incentives to retain control
     benefits (Eckbo-Thorburn 03)
    Personal liability for late action

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Out-of-court solutions

    France: many workouts?
    UK, Sweden: few workouts?
    Similar rates of bankruptcy filing for
     defaulted firms across UK, Germany
     and France (Davydenko-Franks 04)
    German banks form bank pools to
     facilitate voluntary workouts (Brunner-
     Krahnen 04)
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Recent reform

    EU encourages its member countries to
     strengthen their provisions for
    Recent reforms in many European countries
     undermine creditor rights and decrease
     transparency in exit costs
    US development towards using market
     mechanisms (Baird-Rasmussen 04) and
     increased transparency
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    Different bankruptcy codes impose different
     costs on distressed firms
    French reorganization code appears to fail
     successfully restructuring firms
    Swedish auction code seems relatively low-
     cost and transparent, along with UK code
    Is reform in Europe going in the wrong

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