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Fitch: Insolvency Regimes in Spotlight as Investors Look to Next Default Cycle
February 13, 2014 / 9:17 AM / 4 years ago

Fitch: Insolvency Regimes in Spotlight as Investors Look to Next Default Cycle

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Comparing Major Bankruptcy and Insolvency Regimes here LONDON/FRANKFURT/NEW YORK, February 13 (Fitch) Fitch Ratings says in a new report that losses from the next leveraged finance default cycle may be significantly in excess of previous cycles. This reflects weakening new-issue rating mix in bond and loan markets as leverage levels rise and covenants become increasingly lax in both the US and European markets. "Knowledge of insolvency regimes will be critical to cross-border investors when determining recovery and pricing in relative creditor rights," says Sharon Bonelli, Managing Director in US Corporates. Today's comparative study of insolvency regimes in the US, the UK, Germany, France and Luxembourg reflects strong high yield and leveraged loan issuance volumes out of these countries and they represent the mix of separate legal traditions attempting to keep pace with the complexities of global business operations and capital flows. The report describes the traditionally different approaches between regions and puts them into the context of the development of capital markets. While the US system has historically put much more emphasis on a debtor in-possession framework with the goal to rescue and rehabilitate the distressed company, the European systems have the legacy of creditor-in-possession frameworks. Legacy European regimes assumed debtors and creditors exhausted all potential remedies and resulted in liquidation via sale of the company or its assets as the principal means of resolving creditor claims. "In recent years, as European corporate finance has emphasised more diffused US-style capital market products and practices, insolvency laws have been amended to include mechanisms that aim to replicate the spirit of the US Chapter 11 framework, while the specifics continue to differ substantially," says Karsten Frankfurth, Senior Director in the EMEA Leveraged Finance group. Historically different approaches towards companies in distress have a profound impact on the structural developments of capital markets. Europe's privately rated loan market, minimal covenant-lite loan issuance and structurally subordinated high yield bonds all reflect the influence of legacy creditor-in-possession frameworks in contrast to the US. While there is a general trend towards more rehabilitative processes in Europe, substantial differences remain with regard to the application of established yet competing concepts like priority and prioritisation. Consequently, forum shopping, with the UK Scheme of Arrangement process the established pre-insolvency forum of choice, and ad hoc judicial activism highlight greater uncertainty in comparison with established US tenets. While reforms towards more accommodative and rehabilitative frameworks develop in Europe a major review of US bankruptcy practices is also underway. In the report, Fitch also provides an overview of the broad principles on selected processes available in these countries. These are intended to illustrate how the differences in re-structuring cultures and codes have influenced the processes available and what they generally mean for creditors and debtors in a distressed situation. Today's report has been prepared with the assistance of law-firm TaylorWessing, SheppardMullin and OPF partners Luxembourg. Contacts: Sharon Bonelli Managing Director +1 212 908 0581 Karsten Frankfurth, CFA Senior Director +49 69 7680 76125 Edward Eyerman Managing Director +44 20 3530 1359 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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