Orderly Default: (ver em português abaixo)
1. When the borrower defaults on payment of one loan/bond, it stops paying all other creditors at the same time, imposing (unilaterally) a “stand-still”, so that no creditor is favoured with preferential repayments, nor special collateral or guarantees. Generally, borrowers are required to freeze principal reimbursements, but to continue making interest payments, pro rata, at the contractual interest rate, or at a standardized minimum interest rate applicable to all the creditors.
2. Guarantees are called and paid and guarantors take over the creditor position of the guaranteed lender
3. All loans and bond issues have cross-default clauses and thus all creditors accelerate, declaring their credits due and payable; the seniority of creditors secured with real guarantees is confirmed
4. All short and long creditors are represented the debt negotiation table
5. Debt negotiations include various elements, including
a. Increased scrutiny and monitoring by the creditors
b. Austerity and growth measures to be implemented by the borrower
c. Full accounting and review of all liabilities of the borrower, including hidden and contingent liabilities
d. Change in management of the borrower and/or the creditors, out with the rogues, who are responsable for the overleveragng, and may not even admit the problem exists
e. Restructuring of all the existing debt, for much longer tenors and softer interest rates. The exact terms of the debt restructuring may depend on the needs of the borrower and its potential for turnaround. Weaker borrowers need longer maturities, 15-25 years, and lower interest rates.
f. Creditors may also be asked to forgive or discount 10-20-30% of the debt, or convert part of the debt to equity. In these cases, creditors retain some upside, or clawback clause (salvo regresso melhor fortuna). At this stage, banks usually have to be recapitalized in order to be able to absorb the losses.
6. Existing creditors are also asked to provide new debt to help finance the borrower’s working capital, trade finance, restructuring costs and even some investments for growth in order to maximize recovery for creditors. These new credits may have to be provided by the existing creditors, pro rata to their existing exposure.
7. The borrower’s recovery is monitored continuously and the program adjusted as needed until the borrower regains access to financing on normal market terms.
And they all live (more) happily ever after (than in the case of a disorderly default)
Mariana Abrantes de Sousa
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