FSB publishes peer review on out-of-court corporate debt workouts

The Financial Stability Board (FSB) has published a Thematic Review on Out-of-Court Corporate Debt Workouts. The objective of the peer review is to support Covid-19 response and recovery efforts by examining FSB member jurisdictions’ practices, experiences and lessons from out-of-court workouts as a less costly and more flexible alternative to full, formal insolvency proceedings.

The review finds that FSB jurisdictions have adopted various approaches to complement in-court insolvency proceedings and facilitate restructurings through out-of-court frameworks. Most of these frameworks were in place before COVID-19, but some are new or have been amended. However, data about the use and outcomes of workouts is scarce, making it difficult to compare the performance of different frameworks within and across jurisdictions.

Small and medium-sized enterprises (SMEs) face challenges in out-of-court workout frameworks mainly due to their complexity and cost, so about half of jurisdictions have developed specific or simplified frameworks for SMEs.

Financial sector authorities’ involvement in out-of-court workouts and debt restructuring can sometimes be direct – such as through codes of conduct and sets of principles – or indirect, by relying primarily on voluntary agreements between private parties.

The report recommends that FSB jurisdictions should consider assessing the efficiency of their out-of-court workout frameworks, collecting data and developing metrics for these assessments, reviewing whether there are significant barriers to their use by SMEs, and taking steps to reduce such barriers where necessary. In addition, the FSB, working with other international bodies, will promote the sharing of practices and experiences.

Tomoko Amaya, Vice Minister for International Affairs at the Japan Financial Services Agency (JFSA) and Chair of the peer review team, said “The potential for increased corporate stress in the aftermath of the COVID-19 pandemic underscores the importance of effective out-of-court workouts. The review shows that there is no one-size-fits-all approach to such workouts.”

Fahad Almubarak, Governor of the Saudi Central Bank and Chair of the FSB’s Standing Committee on Standards Implementation (SCSI) that oversaw the preparation of the peer review, said “This report provides a valuable comparison of the approaches and experiences of FSB jurisdictions with out-of-court corporate debt workouts. Jurisdictions should review their frameworks and look for ways to make them more accessible to SMEs.”