Call for US-style insolvency is misguided
MARTIN COLLINS: John Durie | January 24, 2009
BACK in June two years ago, Babcock & Brown had an equity value of more than $13 billion. Now it is worth zero.
Worse, like the old Donald Trump joke, the street beggar was worth billions more than him because he owed the bank billions and the street fellow owed nothing.
B&B's Michael Larkin is hoping he can convince the banks to swap the $3.5 billion the company owes into equity and return the stock to the bourse as more of a compliance listing.
The collapse of one of the high-profile bull market darlings means the Australian banks (with the Government ready to clean up their mess) now only have to worry about falling property values and other assets pledged against debt.
Figures from Sydney-based Restructuring Works show the value of new asset impairment charges of the banks more than tripled in the year to September to $13.3billion.
It will clearly rise this year, with National Bank's Cameron Clyne tipping that after falling as low 20 basis points as a percentage of assets, bad debts will rise to at least 55 basis points (the long-run average).
Back in 1993, some banks faced as much as 2 per cent of bad debt charges.
The question then comes whether existing procedures offer the right protections.
Practioners like PPB, an advisory, say the biggest problem they face is education: everyone wants the other person to take the hit, but refuses to do likewise.
Inevitably, the misguided call comes for a US Chapter 11-type insolvency regime.
A Baker&McKenzie study comparing US Chapter 11 with Australian Voluntary Administration practices neatly explains why the US system wouldn't improve the situation.
In no particular order, it works like this: in the US, management stays in place and in control subject to court supervision. In Australia, the corporate undertakers are wheeled in.
In the US, all creditors are blocked from taking action. But in Australia, secured creditors (mainly banks) can enforce their rights.
If shareholders are misled in Australia, they have some right of claim. In the US, they always rank behind unsecured creditors.
In Australia, the process can be completed in as little as 15 days. In the US, it can be pre-packaged in 30 to 90 days, but the average Chapter 11 case takes 18 to 24 months.
Beware folk (like Malcolm Turnbull) who see Chapter 11 as a cure-all answer, but there is merit in his and other calls for a formal review of insolvency practices.
