The recast European Insolvency Regulation – impact on distressed debt investors
In 2002, the European Insolvency Regulation (EIR) introduced a regime governing the administration of insolvent corporates or individuals which operate in more than one member state of the European Union (EU). A "recast EIR" will apply to insolvency proceedings commenced on or after 26 June 2017.
Why are the EIRs important?
The EIRs ensure recognition, without further formality, of insolvency proceedings throughout the EU (except Denmark) and determine the law applicable to such proceedings. They apply only where the debtor's centre of main interests (COMI) is situated in a member state (other than Denmark) and do not apply to insolvency proceedings on foot in other jurisdictions. The EIRs are only binding on participating member states and so will be of limited practical use where assets are situated outside the EU. The EIRs envisage there being one set of main insolvency proceedings, with the possibility of multiple territorial (or secondary) insolvency proceedings.
Does European distressed debt represent a compelling investment opportunity for investors? Since the start of the financial crisis in 2007 this has been a recurrent question with no consensus among investors as to which answer is the correct one. Still today, despite the many examples of successful distressed transactions in Europe, many of these investors still are reluctant to answer with a firm “yes” when being asked this question.
There are in our view two key misconceptions when approaching European distressed debt which are framed as follows: (i) European banks do not sell NPLs and when they do they do not sell at distressed prices, and (ii) the European restructuring legal framework is not creditor-friendly and does not allow for the implementation of successful restructurings making liquidation the only possible outcome.
Despite the fact that we can appreciate that these concerns may have been applicable pre-2007 crisis we believe that at the present time these do not longer apply, or at least their weight has been substantially reduced.
The deleveraging process by European banks