The Challenges of Emerging Markets Debt Restructuring
Aligned with our mission to mobilizing capital and investing in emerging markets to achieve financial returns while generating a positive societal and environmental impact, at responsAbility, we strive to bridge the gap between investment opportunities and sustainable development in emerging markets (EMs). As we navigate the landscape of corporate debt restructurings in these markets, we recognize distinct differences between restructuring processes in emerging markets and advanced economies (AEs). These differences significantly influence both the processes and outcomes of debt restructurings, shaping the path for stakeholders involved. What special restructuring challenges characterize emerging markets (EMs)? We have identified “Ten Observations”, outlining key differences between corporate debt restructurings in EMs and AEs, which directly impact both processes and outcomes. These observations are distilled from our extensive experience in emerging market restructurings, as well as insights from fellow senior restructurers. These observations can be found in our upcoming book Emerging Markets Debt Restructuring – Effectively Navigating Local Institutional Frameworks. Palgrave Macmillan Springer, 2024. Well-developed and stable political, legal, and economic institutions are typically associated with superior and lasting economic outcomes. These institutions play a critical role in debt restructuring in two ways:
Macroeconomic conditions and non-performing loans: Adverse macroeconomic conditions correlate more strongly with heightened non-performing loans than idiosyncratic, borrower-level characteristics. However, the latter still plays a significant role in corporate debt distress episodes.
Institutional framework and loss-given default levels: Once a default occurs, jurisdictions with certain key elements tend to lower loss-given default levels:
A financial community which understands, accepts, and uses frameworks for consensual, multi-party, out-of-court restructurings (such as Insol II);
Well-developed specialized, independent and effective judiciaries, bodies of law, and insolvency office holders, to handle debt resolution effectively when formal processes are needed;
Appropriate financial and legal structures, along with skilled professionals, to facilitate transactions like DIP (post-petition) financing, debt-to-equity conversions, and pre-packaged or pre-negotiated restructuring plans.
In jurisdictions where such institutions are lacking, secured lenders often react to defaults by immediately accelerating and enforcing collateral, leading to liquidation. This occurs even in cases where a consensual, multi-party restructuring or a court-administered process might have saved the borrower. In such countries, the lending community might even be referred to as “glorified pawn shops,” due to their heavy reliance on collateral-based rather than cash-flow-based finance. Our Ten Observations reflect how these institutions are either missing or operate imperfectly in EMs. The fundamental challenge for the EM restructuring professionals is to overcome these resulting “gremlins”, to maximize economic outcomes for all stakeholders. At responsAbility, we believe that understanding and overcoming the unique challenges of EM restructurings is essential for driving sustainable development and achieving lasting economic progress. We hope that our observations and case studies will serve as a valuable resource for professionals in the field, helping them navigate the intricate and often unpredictable world of emerging market debt restructurings.
About the authors
Richard Marney is a senior advisor for risk management at responsAbility Investments AG, a leading Swissimpact asset manager, where he has worked for the last decade. He previously served as the firm’s chief risk officer. Prior to responsAbility, Richard had a broad and varied 40-year career in emerging and frontier markets banking and principal investing, with senior-level business and corporate development, risk management, and operating roles, including with BNY-Mellon and JP Morgan. Richard currently sits on a number of boards of directors and investment committees in the emerging markets, including the African Guarantee Fund, Oasis Credit (Uzbekistan), Mikro Kapital (Moldova and Romania), Beacon Fund (Vietnam), and Finca (Armenia). He co-authored with Timothy Stubbs Corporate Debt Restructuring in the Emerging Markets: A Practical Post-Pandemic Guide, Palgrave Macmillan (2021). He is a graduate of the Johns Hopkins University, Nitze School of Advanced International Studies, and University College London.
Timothy Stubbs is a partner with the global law firm Dentons based in London. Tim has worked on emerging markets transactions with Dentons (and its legacy firm Salans) since 1992, having previously practiced law in Chicago and New York. Tim also worked for two years in the Office of General Counsel of the European Bank for Reconstruction and Development (EBRD) in London on working sabbatical. Tim has led numerous debt restructurings as well as financings of all types, including bilateral and syndicated lending, real estate finance, and project finance. He coauthored with Richard Marney Corporate Debt Restructuring in the Emerging Markets: A Practical Post-Pandemic Guide, Palgrave Macmillan (2021). He has advised the State Assets Management Agency (SAMA) of Uzbekistan on implementation of (and co-authored with Shukhrat Yunusov the official commentary on) the country’s 2022 Law on Insolvency. He is the author of the Russia Country Chapter in Collier International Business Insolvency Guide. Tim is a graduate of the University of Michigan Law School and Center for Russian, East European & Eurasian Studies.