“Interest rates are now skyrocketing at 4%” – an excerpt from a discussion with a young businessman, who, as one conference presenter quipped, has only seen an economy where they had never ever considered interest expenses as “a thing”, and have little understanding of what levels of interest rates where being observed 10, 20, or 50 years ago!
Huge thanks to Frank Heeman for inviting me to join the INSOL EECC conference “2023 Restructuring and Insolvency Practitioners Survival Kit” that took place in Vilnius last week. I typically don’t go looking for trouble, but it seems we are heading for troubled waters so I was intrigued to learn what was on insolvency specialists’ minds. It was my first (but definitely not final!) time with the great INSOL crowd, met a lot of new people and had a chat with some good old friends from the Baltic’s market as well.
Some other ideas from presenters and discussions during coffee breaks that caught my attention:
Number of opened bankruptcy proceedings in Lithuania is up by almost 50% this year
While NPLs are still at all-time lows in many countries, including the Baltic States, two big reasons were discussed: i) state aid during COVID pandemic which covered over possible insolvencies, and ii) the fact that banks have an incentive to not book loans as NPLs due to high capital costs; both of these factors have contributed to the existence of “zombie” companies that survive only on free, long term government debt, with bullet payments that are unlikely to be serviced.
We are starting to see cases of insolvency in construction / real estate sectors, where due to constraints of public procurement projects historically won tenders no longer profitable due to increases in prices of materials and labour, but companies are compelled to go through with them due to fear of being blacklisted from future tenders.
It is likely that we will start seeing first significant signs of insolvencies in the high-risk part of this sector, and especially in cases of real estate crowd-funding and p2p platforms, where projects are small, developers have less experience, platform operators do not have means or tools (or even data) necessary for effective recover, and investors are easily spooked.
Found out that as of July 2021 we have an EWS (early warning system) via VMI in Lithuania, which automatically identifies and informs companies that the are at risk of becoming insolvent; the jury is still out on its effectiveness; out of 739 companies identified during the first year of operations just over 5% of them registered for a consultation with VMI.
In Lithuania we had 500 restructuring cases since 2001, and only 50 were successful; nobody wants to be labelled as “in restructuring”, as it’s associated with being “unsuccessful” or “almost bankrupt”, which adds to the further determent of the company.
While in general bankruptcy stigma is still a prevailing issue in all countries, it will be quite different for cases such as p2p and crowdfunding cases, as there is no middleman (think “banker”) between lenders and creditors.
Learned about cross-class cram down in restructuring cases, and how creditors who perceive themselves as 100% fully covered and/or expecting instant recovery can be in for a surprise.
Interesting story on the bankruptcy of Amsterdam Trade Bank (ATB), a commercial bank registered in the Netherlands but majority owned by Russian Alpha Group, which went bankrupt directly as a consequence of sanctions; linked to this was a discussion on whether bankrupt or defacto insolvent entity still fall under sanctions, even at the disadvantage creditors?
On sanctions in Lithuania: of roughly 1600 companies identified as having ties or business to Russia only 16 are sanctioned, and only 1 has a temporary administrator; one company had a sanctioned shareholder, so the company initiated a share buy-back (bought shares on its own book) – while it seemed like a ‘solution’, it’s most likely that the transaction will be deemed in breach of sanctions regime regardless.
Did you know that as of 6 October 2022 in Lithuania a Russian company, for example a creditor, is not allowed to hire legal advice from a Lithuanian lawyer even if the company is not sanctioned or blacklisted? Representation in court is allowed, but it still may take a lot of work to get to that stage.
While many of you know I typically want little to do with #crypto, it was interesting to hear that Estonia had over 2500 registered VASPs as of 2020, and though their regulator has since cooled on this idea there have been no bankruptcies in this segment.
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