Sunday, January 29, 2012

Spanair and Spain’s harmful bankruptcy legislation

Spain managed to score a huge own-goal with the abrupt shutdown of Spanair. In a country that relies on tourism as a huge fraction of it’s GDP, the secondary damage to the tourist sector will be huge. The sad thing is that this is a lose-lose situation for everyone: tourists get stranded in Spain (or never come in the first place) and unsecured creditors will get little to nothing.

In the US, Spanair would have entered bankruptcy under “Chapter 13” last year, which would have allowed it to continue day-to-day as the owners, receivers and creditors figure out a way to either shrink, sell, renegotiate, etc in order to maximize the value for everyone. Only in the case where things were absolutely hopeless and there was no business value whatsoever, would the company have been liquidated.

Spain is different, of course. If you want the gory details, go here, but the executive summary is this:

A debtor in Spain would only resort to file a petition for suspension of payments or bankruptcy as a last measure, when it is generally too late to take effective actions for restructuring the business. Thus, most of the insolvency cases in Spain (including both suspension of payments and bankruptcy proceedings) end up with the liquidation of the debtor’s assets.

There you have it. Expect this to only get worse as companies are squeezed on one end by higher commodity prices, and by lower demand on the other. At the same time, debts increase and there is no way of restructuring other than liquidation.

The only action the Spanish government seems to have done is sue Spanair for not honoring their commitments to passengers, which seems like the ultimate in pointlessness.

No comments: