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Title: The%20Parmalat%20case%20and%20the%20recent%20bankruptcy%20reform
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The Parmalat case and the recent bankruptcy reform
- Lorenzo Stanghellini
- Facoltà di Giurisprudenza
- dellUniversità di Firenze ()
Colloquium IEEI, Rome, 19 maggio 2006 ()
lorenzo.stanghellini_at_unifi.it
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Part 1
- The Collapse of Parmalat
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Parmalats position in 2003
- Leading Italian food group
- Parent company listed
- 51 owned by the Tanzi family
- Truly international business
- 32 countries, 36 operating companies, 132
locations - Fifth Italian bond issuer ( 7.0 bn, a part of
which publicly rated)
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2003 the first cracks
- Balance-sheet 2002 3.5 bn liquidity
- February a new bond issuance (300 ml) is turned
down for lack of sufficient information - CFO resigns but remains on board
- November Supervising authorities ask
clarifications about liquidity - Deloitte casts doubts over financial statements
5
December 2003 The collapse
- 9th Enrico Bondi, a turnaround specialist, is
hired by Tanzi and the board - 12th Parmalat shares plunge a 150 ml bond is
reimbursed - 15th Tanzi resigns, Bondi takes on as Parmalats
President - 19th BOA denies Parmalats account with BOA
holding substantial liquidity - 23rd Italian Government enacts an emergency
bankruptcy law for very large firms (gt1,000
empl.) - On the same day, Parmalat files for bankr.
protection Bondi is appointed commissioner
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Parmalats collapseWhy? How?
- Why the people did it?
- At least for the core actors (Tanzi), it is not
easy to tell - How could they do it?
- Bad corporate governance
- Ineffective external checks
- Stock market
- Auditors
- Incremental lenders
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Part 2
- The Rescue of Parmalat
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A good candidate for rescue
- 32,000 employees
- More people and firms dependent on Parmalats
continuing operations - Business in equilibrium (decision on rescue based
on assets, not liab.) - Liquidation was simply not an option
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Italian insolvency law (before)
- Allowed continuation of business under court
supervision and protection from creditors - Allowed industrial restructuring and
super-priority financing - Did not allow for financial restructuring
- Only real option under existing law sale of
Parmalat as a going concern
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Italian insolvency law (after) d.l. 347/2003
and Law 39/2004
- But
- Selling large businesses is difficult
- Often yields fire-sale prices
- Law amended to allow financial restructuring,
including debt-equity swap (Law No. 39-2004) - Debt-equity swap proposed to creditors Parmalat
would be sold to its creditors
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Parmalat insolvencyThe restructuring plan
- The plan encompasses 16 companies of the Parmalat
group - Combined assets valued 1.5 bn (enterprise
value) - Total liabilities 25.5 bn (with duplications
for intra-group guarantees and loans net liab.
around 14 bn)
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Parmalat insolvencyThe restructuring plan (2)
- Following a majority vote of the creditors
(August-September 2005) - Creditors claims have been reduced
- According to the asset/liability ratio of each of
the 16 companies some 100, some almost zero - A Newco has been set up
- Liabilities (reduced to 1.5 bn to equal
enterprise value) have been transferred to Newco
together with assets, at no cost
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Parmalat insolvencyThe restructuring plan (3)
- Unsecured credits. of 16 comp. have received
Newcos shares in settlement of claims - Forced debt-equity swap (creditors will receive
shares, plus 1 warrant per sh. up to the first
650) - Secured creditors (plus administr. expenses) have
been fully paid in cash by Newco ( 204 ml) - Newco has emerged with an almost all-equity
financial structure - Newco has finally been listed (Oct. 2005)
- New Parmalats corporate governance according to
international best practices
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Parmalat insolvencysheer technical complexity
- Hundreds of companies in different jurisdictions
- Hard test for EU Reg. 1346/2000 (Eurofood plc)
ECJ decision on 2nd May 2006 - Coordination of non-EU procedures (Brazil, US)
- No consolidation of the group
- The intra-group distribution of assets and
liabilities is taken as a snapshot - No subordination of large intra-group claims
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Parmalat insolvencysheer technical complexity
(2)
- Liability suits against Parmalat in US
- claimants bound by the plan?
- Liability suits (and avoidance actions) by
Parmalat against directors, auditors, and banks - Potentially, a big source of recovery
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Part 3
- Italian Law after Parmalat
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Parmalat Any lessons to be learnt?
- Availability of procedures that allow efficient
financial restructuring is crucial - Distribution of value is difficult
- Valuation of an insolvent firm is difficult
- Multiple valuations are even more so
- Keeping management of distressed firms is
important ex-ante, but less so ex-post in large
companies - Rehabilitation What does it means?
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Parmalat Any lessons to be learnt? (2)
- Creditors committee necessary to achieve
consensus - Unfavourable international press (see,
e.g.,Global Turnaround March 2004) - A Newco necessary to get around the necessary
shareholders vote - ECJ Pafitis v. Banca Trapeza (1993)
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Parmalat case What it does NOT tell
- Parmalat needed pruning and turnaround
- Business was profitable (albeit much less than
told) - Therefore no tragic choice (creditors vs.
employees/suppliers) has been necessary - Alitalia (more than 20.000 employees and
significant operating losses) would be a much
more problematic case
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however, Parmalat was an easy case The
business was profitable
- Financial statements 2002-2003 revised by PWC
(press release 26 January 2004)
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The new composition procedures (a) The
Concordato preventivo
- Decree-Law 14 March 2005, n. 35 New concordato
preventivo - Plan by the debtor to avoid the bankruptcy
procedure (Fallimento) through a composition
with the creditors - High degree of flexibility, classes of creditors
- No constraints on financial restructuring
proposals by the debtor - Debt for equity swap possible pursuant to a
majority vote - New Art. 160 of bankruptcy is taken almost
literally from Art. 4-bis l. 39/2004 (Parmalat
law)
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The new composition procedures (b) The
Concordato fallimentare
- D.lgs. 9 January 2006, n. 5 the new concordato
fallimentare - Plan by the debtor, any creditor or third party,
to close the bankruptcy procedure (Fallimento) - Same potential for restructuring of the new
concordato preventivo - New concept of concordato
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The legacy of Parmalat
- A giant leap forward. Now let us consolidate
- Reform of general bankruptcy law by d.lgs. 9
January 2006, n. 5 an important work in progress - Generalize Parmalat NO, thanks
- Creditors have been kept out of the door
- Called upon at the end for a vote on a plan take
it or leave it - The success of Parmalat turnaround is due to the
business and the people who worked on it. Now
its enough
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