Europe's Newest Innovation: Bankruptcy
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With the number of distressed businesses in Europe soaring, the Continent's bankruptcy laws are getting an extreme makeover. And the model for European lawmakers is Chapter 11 of the U.S. Bankruptcy Code.
The huge volume of distressed businesses in Europe–100,000 companies closed in Italy last year alone–has exposed holes in European insolvency laws. A vast majority of cases ended in liquidation, rather than with the company getting a fresh start.
But over the past year, France, Germany, Spain and Italy all have revamped their laws with the aim of saving companies and, with them, precious jobs. They are importing elements of Chapter 11 previously unheard of in Europe: fresh financing, "cram downs" of debt restructuring on reluctant creditors, and debt-to-equity swaps that could open the door to new investors.
Such tools are critical given the wave of refinancing expected soon: €500 billion, or $650 billion, of boom-time leverage buy out debt comes due in the next three years. Meanwhile, bad loans are rising at banks throughout the Continent, and insolvencies rose 34% between 2007 and 2011, according to Creditreform.
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