Determinants of Delays in Corporate Reorganizations.
| Autor | Silva, Vinicius Augusto Brunassi |
1 Introduction
This paper uses a novel database of delays in the reorganization of bankrupt companies. Previous literature notes the importance of coordination and bargaining during the reorganization period, in which information asymmetry and conflicts of interest appear to play a crucial role. Theoretical evidence on bargaining theory states that a considerable delay in reaching an agreement may occur when there are informational disparities between parties (Kennan & Wilson, 1990) and when the number of bargainers is large (Cai, 2000).
Focusing on Chapter 11 and Chapter 7 bankruptcies, the aforementioned researchers noted that delays can occur in imperfect information models when parties share bargaining power. Chapter 11 reduces coordination problems by grouping creditors into classes according to their claims in court reorganizations. In practice, however, contracts appear to be incomplete and investors and the court system are unable to provide sufficient conditions for enforcing all rights. The holdout problem increases the difficulty of resolving financial distress and creditors or debtors may occasionally prefer to postpone voting on a reorganization plan to demand more agreeable and reliable conditions.
According to Ivashina, Iverson, and Smith (2016), claim administrators are hired by Chapter 11 debtors to organize and provide information on all claims and claimholders. The administrators are representative agents who obtain creditors' decisions about the restructuring plan. Nevertheless, the bargaining conditions related to a delay in voting on the reorganization plan cannot be evaluated for each creditor that is available to vote in all classes because creditors do not meet in an assembly.
Because of the absence of appropriate US data on the subject, knowledge on delays in the reorganization plans of distressed firms is limited. For example, creditor committees in the US generally include representatives of only unsecured creditors. Hence, it is difficult to identify how the different classes of creditors decide to vote on or postpone the reorganization plan in each case. The interests of distinct groups may frequently diverge in reorganization cases. Therefore, the data provided by the committees' representation might not adequately capture the reasons related to each delay period. This paper's objective is to identify these reasons.
In Brazil, unlike the US, creditors meet to vote on reorganization plans. The minutes of the assembly record the events of such meetings, providing evidence of creditor demands for additional changes and debtor responses to claimholders' considerations and suggestions. Moreover, it is possible to observe which creditors showed up to vote on the plan, their claims, and the outcome of the vote. We argue that such conditions enable us to obtain valuable information about the characteristics of decisions related to delaying votes because of the ability to observe the process undertaken when different classes and types of creditors meet in creditors' meetings and decide to postpone a reorganization vote.
We explore descriptive statistics of reorganizations and controlled correlations in our regressions without suggesting causality. To the best of our knowledge, there is still a lack of empirical results based on evaluations of multiple creditor characteristics and the reorganization proposals presented in firms' reorganization plans. This is the first paper in Brazil to explore how conflicts of interest among different classes of creditors may relate to delays (more days to vote on the reorganization plan) in reorganization processes after the new Brazilian bankruptcy law.
This paper follows a strategy similar to that of Kaplan and Stromberg (2002) by highlighting the descriptive statistics of databases that suffer from sample bias, which cannot be excluded by quasi-experiments. For that reason, we do not address causality in our study. Because we cannot control for previous capital structure decisions, liquidity levels, and other financial statement variables that make the resolution of distress more (or even less) complex during the reorganization process, our regressions may present some bias attributable to the omitted variable problem.
The decision to delay a reorganization plan vote may damage creditors and firms in Brazil in several ways. Creditors cannot receive any value before the reorganization plan vote. The money to be recovered by the creditors will not earn interest during the delay. This is particularly important in Brazil, which has one of the highest interest rates in the world. In addition, banks must make a provision for 100% of the amount borrowed in reorganization cases as a guarantee of operation. This may reduce bank interest because banks earn less in these situations compared with other market alternatives. Firms cannot obtain new resources to continue their operations until creditors decide on reorganization or liquidation. Longer delays to vote on a reorganization plan can increase the difficulty of the reorganization.
Unlike creditor committees in the US, official creditor committees are rarely formed in Brazil. In general, creditor committees in Brazil have three types of representatives: labor, the secured class, and the unsecured class. We did not include the fourth class of creditors because the number of cases in our database was minimal.
Our data originated from firms and the websites of certain judicial trustees in Brazil and they are composed of 120 reorganization plans dating from 2005 to 2015. We chose to begin in 2005 because the new Brazilian bankruptcy law was enacted that year. Therefore, our study provides information about the resolution of the financial distress of firms in Brazil considering 10 years of data following the enactment of the new Brazilian bankruptcy law.
In our sample, we observed certain cases in which creditors required more than 100 days to vote on the reorganization plan. The highest quartile of our sample revealed that an average of 101 days was required to vote on the reorganization plan. After studying the characteristics of the different types of delays, we were able to show that the average delay is longer when all the different classes are in charge of voting on the reorganization plan, whereas the delay decreases considerably when only one class is voting on the plan. By segregating the economic distress analyses, we found that the average delay is longer for lower levels of economic distress (sector return) for both secured and unsecured creditors.
Our results revealed that a high concentration of debt among the different classes of claimholders appeared to be related to fewer delays. Moreover, a higher number of banks and secured creditors with claims in the reorganization appeared to be positively correlated with delays. We did not find statistically significant results regarding the number of labor and unsecured creditors in our regressions.
Finally, we argue that reorganization plans that require additional time to reach a vote are related to divestment proposals. The minutes of the general meetings show that many rounds of discussion are required to determine the assets that should be sold to generate cash. The creditors usually noted the minimum acceptable price to be adopted. In addition, firms encounter certain difficulties in obtaining the permission of secured creditors to sell assets that were allotted to the creditors as collateral before the reorganization period.
Our paper contributes to the literature developed by Gilson (1990), Gilson, John, and Lang (1990), Brown, James, and Mooradian (1993), Franks and Tourus (1994), Helwege (1999), Ayotte and Morrison (2009), Ponticelli (2012), and Ivashina et al. (2016) regarding the characteristics of delaying reorganization plan votes during restructuring cases. We corroborate the results obtained by previous papers and provide an analysis of the role played by each class of claimholders in delaying reorganization plan votes for Brazilian companies.
The structure of this paper proceeds as follows. The second section discusses the related literature and provides information about the types of delays for reorganization plan votes under Brazilian bankruptcy law. The third section presents a description of our data, and the fourth section describes our empirical analysis strategy. The fifth section provides our empirical results, and the sixth section presents our conclusions.
2 Delays during the firm reorganization process
We were able to identify the outcomes of Chapter 11 filings and post-bankruptcy performance by reviewing papers by Gilson (1990), Hotchkiss (1995), and Kalay, Singhal, and Tashjian (2007). Despite the significant contributions that have been made on the topic of reorganization, there has not yet been a comprehensive and in-depth analysis of the delays that occur during the reorganization process.
The dynamic bargaining theory is rich and supports predictions of the time needed for resolutions. The classic model of Rubinstein (1982) predicts immediate agreement for subgame perfection under symmetrical information. Admati and Perry (1987) study a bargaining game with incomplete information to understand the time between offers, finding that a time delay signals a bargainer's strength. Studies on delays are also carried out in other areas of knowledge (Das, Ghosh, and Subudhi, 2014; Zhang, Knopse, and Tsiotras, 2001).
Gale (1995) argues that delays are inefficient because social gain does not occur when players discount the future. In coordination games, it can be beneficial for an individual investor to delay; however, investors would be better off overall if they make an immediate decision. Theoretical evidence also supports the occurrence of delays when there are informational disparities between the parties (Kennan & Wilson, 1990) and the number of bargainers is large (Cai, 2000).
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