What is my mission as a crisis manager? What to expect from the insolvency market?
600 European companies go into liquidation every day. 1 in every 2 new companies survive less than 5 years. These were statistics before Covid-19.
Trends in insolvency and in the NPL market
What is the situation during a pandemia that effects all economies worldwide? Not surprising at all, the number of insolvencies is lower this year than the last year and below all projections and estimations. What we are living now can be called the calm before the storm.
There are a few factors that are causing this apparent decrease of insolvent companies in almost all countries Europe wide:
Therefore, when comparing with the same figures from 2019, in the first half of 2020 there has been a general decrease in the number of new insolvencies in most countries (Western Europe the registered difference was of approx. 15%).
However, short-term measures can only have a short-term impact.
What will happen next? NPL investors will have a massive market available to them. The challenge will come in assessing the viability of all opportunities in the new landscape that is covered with uncertainty.
There are different estimations, some say that the number of global corporate insolvencies will increase by 25% in the next year, while others estimate that the increase will exceed 35%, the certain thing is the volume of Nonperforming loans will follow an upward trend.
Insolvency trends do not follow NPL trends
There is no direct connection in between the volume of NPLs and the number of insolvencies.
The explanation is obvious. The link between the volume of NPLs and the actual number of insolvencies is always related to the legal system of each country. Even though an economy may be extremely affected by a crisis, which will of course lead to over-leverage borrowers and a high level of NPLs, that does not always translate into a high number of insolvencies as well.
And a very good example in this respect is the situation of Greece. Even before the Covid-19 situation, Greece was holding the largest volume of NPL in Europe, with more than 41%, however, Greece is also the only country with a cumulative decrease in insolvencies in the last years.
Legal infrastructure is very important in the way the organic reduction of NPLs is being ran by every country: the insolvency and restructuring professionals play a key role in the insolvency process, crisis managers can maximize the recovery rate, the specialized courts are an extremely important part of a health insolvency system, the involvement of the courts in the process – can expedite or slow down the process, protection for the debtor, incentive for creditors, new financing, use of electronic means.
When these elements are missing from a country’s system, the insolvency proceedings cannot stand as a proper tool for recovery. And distressed companies and creditors are in the position to find alternative ways of recovery, that comes with no protection for any of them, no guarantees, no formal picture.
Therefore, they are taking many risks, that at the end of the day, will lead to a really low rate of recovery and a risky market for NPL investors. This is the current situation in Cyprus.
In many cases the creditors and the debtors in distress leave aside important sources of income that will contribute at the level of recovery in a case.
Once appointed as crisis manager, we started assessing all sources and resources of the case and we realized that the company is sitting on a high number of unrecovered amounts (around 30 million euro). Therefore, one of the first measures we took was to restructure their legal department that was running the recovery process. We brought new people, we implemented clear management routines, budgets, KPIs for each person, basically we brought in a clear team leadership. As a result, compared to the year before our appointment when the company recovered 300,000 euro in the year following the appointment, we manage to recover 2,565,217 euro and this trend was kept the next year as well.
The recovery rate will be very much influenced by the existence of a crisis manager that is involved in the process.
In 20 years of experience we understood that the mission of a crisis managers is to find the value in every insolvency and restructuring case and to save it or increase it where that is possible. Sometimes that means saving a company, other times means saving value that we manage to find in that company: maybe the brand, maybe the product, the share market, or the core assets. All in all, translates at the end of the day or the case in a higher recovery rate.