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A new shape for restructuring in the EU?

Many years in gestation, the European Union Directive on preventive restructuring frameworks sets a July 2021 deadline for member states to more closely align their national restructuring and insolvency laws. What changes does this imply and how will it impact direct lending decisions for the international business of Federated Hermes and our clients?

Rules to create a more harmonised EU-wide approach to restructuring and insolvency were first mooted in the aftermath of the financial crisis of 2008-9. However, it took until June 2019 for the EU Commission to approve the Directive, which finally comes into force this summer.

The key aim of the directive is to introduce more preventive and early intervention measures into restructuring and insolvency laws to give debtors in financial difficulties more breathing space and avoid insolvency where possible. Although this could limit creditors ability to act it is also expected to result in more and quicker out of court procedures, similar to ‘pre-pack’ (pre-packaged insolvency) schemes often used in the UK.

We welcome the changes, since ultimately recovery rates should be higher if companies can be restructured earlier and kept viable. The harmonisation between EU countries will also be beneficial for lenders with security in several jurisdictions within one transaction, which is often the case in investments we make.

Within our direct lending capability at the international business of Federated Hermes, our strategy from the outset has been to focus on lending in Northern European jurisdictions (Nordic, Germany, UK and the Benelux) where historically recovery rates have been the highest in the Europe and hence offer the highest protection to our investors1. So, the key question for us is does the directive necessitate a change in approach?

We explore this question in our latest commentary.  

  1. 1For the purposes of our strategy, we define Northern Europe as Germany, Benelux, Nordic countries, the UK, Ireland and Austria. Southern Europe is defined as  France, Italy, Spain, Greece and Portugal.

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