EWD Publications BANKCRUPTCY

December 2007 News East-West Debt

East-West Debt started its activities in 1997 when Dutch and Belgian economists and counsellors with more than 15 years of experience in the market found each other and decided to establish a structured cooperation.

East-West Debt permanently monitors political and financial situation in several high-risk countries.
Indeed, political and international events influence our solutions for solving certain overdue trade or bank debt.

East-West Debt gives its best to register all recent developments in several high risk countries for our clients. East-West Debt managed to gather a tremendous amount of information over the years, which gives us the possibility to exchange this knowledge with our customers. The knowledge that we have built up is partly published in the form of newsletters which we send out on a regular basis to a controlled network of financial professionals within multinationals, governments and banks all over the world.

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From the December 2007 publication: BANKCRUPTCY

Credit management and bankruptcy
Credit management and bankruptcy: or how to juice a dry lemon.

Every credit manager sooner or later in their career will be faced with "bad debts". Debts that for various reasons are hard or impossible to retrieve. So called "bad debts" are at some point stricken of the books or renegotiated into new contracts, rescheduled or if your lucky paid in full by your credit insurer.
One particular category of bad, or at least difficult to retrieve debts are the "bankruptcy creditor claims". Often they are hard to assess and there is often a lack of information and clarity. Furthermore, you are most likely to not be on the list of preferential creditors because in most every country the tax office and other state institutions will be first in line.

WRITE OFF, OR INVEST ENERGY?
When the news of bankruptcy becomes public knowledge, stock of larger companies usually quickly devaluates therefore rendering your claim less valuable immediately. For smaller or privately owned companies this is not always the case although many companies "hide" or skim off any valuable commodities or cash before bankruptcy is filed, thus leaving you with empty hands.
Bankruptcy proceedings are at best unpredictable and lengthy, at worse a straight out nightmare. What can a credit manager do, to best deal with a bankruptcy claim?
In any case the first step is to thoroughly document your claim. This is to ensure that your claim will be considered a legitimate claim by the bankruptcy court, the liquidator or curator depending on the type of bankruptcy. Once you have gathered all the supporting documents and filed your claim usually a long waiting period commences.
Assessing your bankruptcy claim will usually be very challenging and you will probably not have the sufficient man-power nor knowledge or insight into the bankruptcy process to adequately evaluate your claim.
Only very large fortune 500-companies usually have sufficient means and know how to effectively assess and administrate bankruptcy proceedings. Also legal costs for retrieving your claim can be larger or too large to risk on assets that might not be retrieved at all.
Most companies will have set procedures of how to manage bad performing debts. But still there are many questions one has to ask. Should a monthly provision be made to be taken of the bad debt? Should it be written off partially or in total and on what time scale? The major question that however should always be answered first: what is your claim worth?
How do you determine the value of your receivables, because it is this value that will direct you towards the correct course of action. A claim that you redeem worthless will consequently be written off but a claim that is still valuable will direct you into the opposite direction. A due-diligence process is therefore an inevitable step in managing your receivables.
Luckily since the internet era, information is at our fingertips and information about most corporate bankruptcy cases is readily available. Because of this transparency in such corporate cases market trading prices for such claims are quite fair in general.
Furthermore, in most cases court documents and financial statements are often a matter of public record.
In the case of a political risk claim "plr claim" this might not always be the case because in these type of countries also described as emerging market countries, information is much harder to retrieve and often falsified by local sources.
There are however some very reliable sources for information on plr receivables. A very good source for values of emerging market paper in general is bradynet
. Other sources of information apart from court papers and financial statements are media coverage. Media coverage in general is an invaluable source of information, however do be careful that especially in emerging markets, local media sources can be highly prejudice. It is always wiser to rely on well known western orientated independent news sources.
An other great source of information can be the local contacts on sight, those are however not always readily available for an average exporter. If you can find local contacts do not hesitate to use them because they might be your only reliable source of information.
If you do not have local contacts you can always contact a specialist such as East-West Debt to provide you with advise on your outstanding receivables. Specialised firms will have local, reliable contacts in most emerging market countries and might find solutions that you are not able to find or negotiate.
The costs for such specialized help is usually neglectable because most specialised companies such as East-West Debt work on a no cure no pay base and without a specialised solutions you would have to write off your bad debt altogether.

Of course you can always decide to sell your receivables. The top 5 reasons why bankruptcy creditors sell their claims are:
1. The mitigation and elimination of risk associated with holding a bankruptcy claim. The sale of a claim also removes the risk of receiving:
-Illiquid equity securities with potentially limited marketability and unknown true market value; and/or
-Small distribution checks over a long period of time.
2. A lump-sum cash payment, giving a creditor immediate cash flow and the ability to reinvest the recovered capital into their business sooner than otherwise expected.
3. The elimination of the time, energy, human and financial capital, and other resources required to monitor and protect a creditor's interests in a case.
4. The time value of money, and possibility of receiving more for a claim now, rather than waiting until the resolution of the estate.
5. The removal of debt off the books. If the receivable had already been written off, the creditor may receive an unexpected cash recovery through the sale.

Of course the most significant factors in a decision to sell or not to sell is the time for money question. How long are you prepared to wait and how is your liquidity position? Can you wait? There are several advantages to selling.
You get cash in and remove bad assets from the books, however in some cases the receivable might generate interest or become more valuable for other reasons over time.
Holding on to bad debt also incorporates a certain amount of risk of which you must be aware of.
The form and degree of risk vary from case to case but some of the most common include:

-uncertainty regarding the form of recovery i.e. cash versus equity
-uncertainty regarding the timing of the recovery
-risks associated with the debtors operations
-the debtors ability to provide reliable financial reports
-the potential consolidation of assets in the estate
-a sale of the company
-litigation risks and uncertainty
-and last but not least, changes in political and or legislative structure.

There is never a clear cut solution to follow in case of a bankruptcy but every creditor should know that the confident and strong, determined to get paid to the last penny, very often lose out.
The advantages to selling or settling a claim at a discount typically outweigh the perceived losses.