Though any professional strategist, worth his/her salt, understands that no plan can be executed in its entirety, under any preconceived framework, however, the COVID -19 pandemic rattled the status-quo with such force that everything came to a grinding halt - literally. It neutered any semblance between the factors of the past and the present that influence policy-making.
However unpalatable it may seem, the category that serves as one of the biggest pillars of any economy, sometimes simply by the virtue of its existence, is big business. That’s one of the reasons why the primary response that any government undertakes in such a case inevitably includes rushing through legislation that safeguards the existence of strategically selected corporations who can keep the economic juices flowing.
Talking about such corporations - the only masters they serve are the shareholders. A lot of big-money companies try to leverage up as soon as they see an opening so that the maximum benefits go to a select class of shareholders. Though the phenomenon was global, a great pinpointed example would be the second quarter of the Trump presidency in the USA. The economy was booming and a Republican-led legislature had just passed a tax reform bill that slashed corporate tax rates on domestic and international incomes. Owing to all these factors, corporations like AT&T bought back stock and outsourced labour to Asian countries, effectively increasing their financial and operating leverage ratios.
Coming back to the point stated earlier, COVID struck like an angry bull, which put every leveraged-up corporation in harm's way. Supply chain lock jams and the absence of a physical workforce pushed companies towards defaults, leading to avoidable bankruptcies and undervalued dumping of assets.
To help businesses of every scale sail through this hardship, governments of almost every country have reached across-the-aisle agreements on how they can alter the existing rules regarding a company's ability to negotiate its debts. As the Primary Impact of COVID was observed in Asia, Europe and North America, we can analyse the policy changes in India, UK and USA.
The United Kingdom
Whenever corporations renegotiate debt, the creditors can be viewed as the aggrieved party because it, in essence, undermines their interests to ensure that the company is safe. Moreover, minor alterations in any of the affirmative or negative covenants running with the debt can shift the entire power dynamic. Therefore, creditors of all categories are engaged in the process of minimising the possibilities of future disagreements.
The new restructuring guidelines ensure that the restructuring negotiations can proceed without the approval of classes of creditors or members who do not have an economic interest in the company. This prevents them from blocking common-sense reform because of motivations not rooted in the wellbeing of the corporation. Also, the requirement that a majority of creditors, of any particular class, must approve a scheme has not been included. The sole requirement is that holders representing 75% of the value of those voting approve the changes.
Finally, the amendments also prevent any supplier to a company from relying on any contractual provision to terminate the supply of goods or services because the company has entered into an insolvency process. A supplier will not be able to block the supply of goods and services on the pretext prior debts have not been satisfied
The Reserve Bank of India had announced, as a part of its COVID relief measures, guidelines for restructuring of loans up to ₹250 million. The approach was different from the UK's because it lays greater emphasis on institutional debt, effectively adding rung on the ladder.
The policy goal in the UK's case was to relax regulations on the extent and ease with which corporations can restructure debt, while Indian policy aimed at inducing the lending institutions to offer relief within a thin-lined framework and a high degree of discretion in terms of institution-specific suitability. The general framework entailed modification of repayment plans and an increased moratorium period to help alleviate the potential stress. Another important point to mention here is that once restructured, every loan would be considered standard and negotiations could not be reopened. The reconstruction framework was revamped for a second round with minor changes. The policy in India was focused on small scale businesses, which are the backbone of its economy.
The United States
As a part of various local and federal COVID-19 relief and stimulus bills, the Federal government and the states have implemented several amendments in their restructuring policies. The stark difference, when compared to policies of the UK and India, is the presence of an extensive evaluative framework to classify debt into different categories and sub-categories. By extension, the restructuring framework also differs for individual sub-categories or a basket of sub-categories along with discretion for deciding the rights of parties involved. As a midway point between India and UK, US policies have no fixed target segment and the power dynamic in terms of party rights has to be evaluated on a case-by-case basis.
Another important element is the amortisation of fees/costs, which are also highly variable across loan sub-categories. For example - If a restructured loan is considered a 'new loan', any unamortised net fees or costs, as well as any prepayment penalties from the original loan, would be recognised in interest income when the said the new loan is granted.
America has gone to the greatest length to preserve the integrity of pre-entered contracts between corporations, individuals and government entities at all levels.
The policy toolkit that different countries have adopted to deal with the breakdowns caused by the pandemic has been deeply influenced by their circumstances. But the main takeaway is that the financial services sector has been asked to take a backseat. While in earlier crises, bailing out the big banks was priority number one, now, the systemic priority has been to ensure that employers stay afloat even if the banks have to take the hit for it. Will this bring about a fundamental shift in how we conduct economic policy? That is something only time can tell.
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