Francisco Rodríguez-Nepote participates in the IR Global Virtual Series – Day of Reckoning: Insolvencies in a post pandemic world

Foreward by Andrew Chilvers

When the UK government recently paid Cardiff Airport’s £42.6 million debt and then provided £42.6 million in grants, it was following the same path adopted by governments around the world to try to bring long-term stability to businesses during the pandemic.

Emergency measures like these were designed to protect companies during the pandemic and into the post Covid-19 era.

Such emergency loans – given to countless businesses large and small across the UK – also coincided with announcements by Chancellor Rishi Sunak that the British government was extending its £68 billion coronavirus emergency loan while the employment furlough scheme finally ended in July 2021.

Along with this aid he also included an extension of the £19.6 billion Coronavirus Business Interruption Loan Scheme and the £5 billion Coronavirus Large Business Interruption Loan Scheme. However, while many global business people see rescue packages as laudable, restructuring and insolvency professionals warn it’s a solution that either pushes the problem into the future or – worse – creates zombie companies out of bad and good businesses alike.

In the UK, total company insolvencies for the first quarter of 2021 dropped by 22% compared to the final quarter of 2020 and were down a huge 38% compared to the same quarter in 2020.

Across Europe, North America and Asia it was a similar story throughout the pandemic. The number of insolvencies consistently dropped as a result of various government aid initiatives. In most normal economic cycles, there is often a lag between a financial crash and insolvencies, but the current lag has defied most predictions by insolvency professionals. Initially, they predicted a spike in late 2020, then early in 2021, now they’re saying the increase will be at the start of 2022.

So, the question: when is the wave of insolvencies going to happen – given that governments continue to bail out businesses – and what will be the extent of that wave?

What are the levels of company insolvencies predicted in your jurisdiction? Which sectors have been most badly hit by the pandemic?

Mexico is a unique case because despite being one of the biggest economies in the world, we have very few numbers of bankruptcies. Since 2000 to 2021 an average of 40 cases have been filed per year and Covid-19 hit around one million businesses, with SMEs closing indefinitely. And yet only 42 bankruptcies were filed between 2020-21, so the pandemic did not produce a tsunami of bankruptcies.

Restaurants, cinemas, gymnasiums, airlines and coworking offices were hit badly. However, only one airline, Interjet, was planning to file for bankruptcy in Mexico and the other one, Aeromexico, went bankrupt in the US. Right now, there is not much confidence with our judicial system in terms of filing for bankruptcy and it is surprising that notwithstanding the biggest economic crisis in 80 years, the numbers are actually lower.

What are governments doing to lessen the impact of the pandemic regarding distressed companies? Are these government measures simply delaying the inevitable?

The Mexican president stated clearly that he is unwilling to bail out any company or give moratoriums to pay taxes or social security contributions. He said that if a company fails, it’s up to the owner, because of the pandemic there is more need than ever to ensure taxes are paid and collected. For businesses and their owners, therefore, there’s no moratorium on taxes or social security contributions. But the National Bank and Stock Commission have modified certain restrictions to allow Mexican banks to delay some forbearance as to the borrowers.

And that has been the key. Many borrowers took advantage of this opportunity, which may explain why there has not been an elevated number of bankruptcies. However, we will need to wait and see when that forbearances or delays ends. And aside from that, there has been no other Mexican government measures to attend this pandemic crisis.

So, there’s been very little government interference here at all or no interference at all, despite being a leftist president. It’s very odd for a left wing politician – he hasn’t interfered whatsoever in the economy.

Is the business community happy about this? The short answer is ‘no’. They feel they have been left outside, unprotected. The president has rolled out microloans to the workers, but not to the source of the work, not to the job creators. I think that could well hurt him when the voters go to the polls.

Will the huge numbers of predicted insolvencies and restructurings point to a spike in M&A and buyout activity, particularly across borders? And how are IR Global advisors assisting clients during this period of uncertainty?

There are not a huge number of insolvencies in Mexico, but insolvencies outside Mexico are predicted to spike. Consequently, there may be a lot of M&As and buy outs of Mexican subsidiaries of bankrupt companies in the US or Canada, in particular. And that has been the case with some of our clients. We have been cooperating with Canada and the US to coordinate cross-border insolvency proceedings of American and Canadian businesses that have assets or are holders of Mexican subsidiaries.

And how are we as an IR global adviser assisting our clients during this period? We are honest. Always. We assess the client to seek the available options to avoid filing for bankruptcies. That means, like outside bankruptcy, work out or take advantage of the Mexican banks’ forbearances and delay. Make it clear that filing for bankruptcy in Mexico must be the last resort.

If you compare Mexico, for instance, with Brazil, Brazil has an average of 1,000 cases per year and even lower while smaller economies such as Chile have far more bankruptcies than Mexico. That is why Mexico is a unique case. Being a very big economy, we are simply not used to filing for bankruptcy. It’s actually a unique case across the world.