EBRD insolvency report ranks emerging markets by ease of business rescue

• Kosovo, Moldova and Albania have the most progressive laws outside the EU
• Better insolvency data help to attract investors to secondary NPL markets
• Forty jurisdictional profiles include publicly available insolvency reporting

Read the report

Tomorrow, the European Bank for Reconstruction and Development (EBRD) will launch its Business Reorganisation Assessment Report, a new and comprehensive analysis of insolvency and business reorganisation laws and practices in the economies where it operates.

Part of the report is dedicated to the resolution of non-performing loans (NPLs) and the relationship between NPLs and corporate reorganisation in bankruptcy.

The report’s findings will be discussed in a series of online public events over three days from 1 to 3 February, opened by EBRD President Odile Renaud-Basso.

Register for the EBRD insolvency report events via Glueup.

The report measures the effectiveness of formal legislative restructuring procedures and highlights best practices to prevent financial distress.

“Why do we need governments to adopt a progressive approach to insolvency? First of all, to support post-Covid-19 recovery. Laws that allow a debtor business to reach a consensus with creditors can help it weather a liquidity crisis,” says EBRD General Counsel Michael Strauss. “Second, no foreign investor wants to risk a bankruptcy nightmare in a jurisdiction with medieval ideas on debt. Third, transparent data on insolvencies support more data-driven policymaking,” he says.

The EBRD report confirms that all the economies in which the Bank invests have a legal framework for business reorganisation in distress, whereby companies experiencing financial difficulties and their creditors are able to find a solution to keep the company going rather than wind it down. This allows companies to repay their debts over time, so that creditors typically recover more value.

The report, prepared by Catherine Bridge Zoller of the Bank’s Legal Transition Programme team and Rodrigo Olivares-Caminal from Queen Mary University of London, ranks economies according to how supportive their legal rescue framework is.

European Union (EU) Member States take the top four spots, with Kosovo in a surprise fifth place and Moldova and Albania also making the top 10.

Indeed, Kosovo’s legal frameworks are of such high quality that only a lack of transparent data on insolvency prevented it from coming first, ahead of Greece, Poland, Lithuania and Romania.

“This shows that even an economy that is poorer than its neighbours can introduce progressive legislation,” said Catherine Bridge Zoller, Senior Counsel on the EBRD Legal Transition team and one of the report’s co-authors. “We at the EBRD are committed to working with national authorities to improve the insolvency legal framework and help make their economies as competitive as possible.”

The report also identifies challenges and makes policy recommendations, pointing out, for example, that voluntary restructuring or workouts are uncommon in many economies. Around half the economies do not yet have hybrid reorganisation procedures to allow debtors fast and efficient access to the courts.

Bankruptcy procedures, even those aimed at reorganisation and not liquidation, still carry a considerable negative stigma, the report notes.

 “This report tells an important story of attitudes to business rescue across a wide range of emerging markets,” says co-author Rodrigo Olivares-Caminal, a Professor in Banking and Finance Law at Queen Mary University of London. “It is not just of interest to academics and lawyers, but also to investors in non-performing assets who want to understand their likely recoveries in a distressed scenario.”

The EBRD report urges national governments to provide more long-term solutions for business rescue. This includes enabling more flexibility in business reorganisation and supporting hybrid procedures, where the terms of the reorganisation are negotiated out of court.

The report, published on the Reorganisation Assessment website, profiles 40 separate jurisdictions (38 economies), mapping all of the reorganisation tools in each national bankruptcy system and analysing what bankruptcy data are available. The general availability of data and the degree of transparency are poor in a large number of economies in the southern and eastern Mediterranean and Central Asian regions.

In a chapter dedicated to NPLs, the report finds that in Kosovo and Moldova, business reorganisation tools are helping to address the issue. Survey respondents cited better insolvency and enforcement regimes, better out-of-court restructuring practices and a more developed secondary market for NPLs.

The assessment, launched at the start of the Covid-19 crisis, is based on a survey of 500 experts from nearly 60 countries, mainly lawyers, but also bankers and accountants.

The EBRD’s work on insolvency is supported by the European Commission, the International Development Law Organisation (IDLO), the United Nations Commission on International Trade Law (UNCITRAL), the International Association of Restructuring, Insolvency and Bankruptcy Professionals, and investment councils in selected jurisdictions.