Approaches to Corporate Debt Restructuring in the Wake of Financial Crises

Abstract

The global financial crisis has distressed the corporate sector in a number of countries, affected both by a tightening of credit and weaker consumer demand. As countries now move from the initial crisis containment phase, a period of sustained corporate debt (and operational) restructuring can be expected in order to repair corporate balance sheets and to realign the corporate sector to the post-crisis economy. The insolvency law is one important tool to support orderly corporate debt restructuring. But insolvency law solutions are not sufficient to address the scale of debt distress that can be expected to arise in the wake of a financial crisis. A key policy question is how to calibrate government intervention, including focused insolvency law reform, to spur the debt restructuring process. This paper starts from a discussion of the economic case for moderated government intervention in debt restructuring in the nonfinancial corporate sector. It then draws on lessons from past crises to explain three broad approaches that have been applied to corporate debt restructurings in the aftermath of a crisis. From there, it addresses challenges in designing and implementing a comprehensive debt restructuring strategy and draws together some key principles. I.