Sunday 28, January 2018 by Jessica Combes

Egypt's new bankruptcy law credit positive for banks

 

The Egyptian parliament has approved Egypt’s first-ever bankruptcy law, a move that will encourage local and foreign investment in the country, according to Moody’s.

The new law is credit positive for banks because it will provide them with more options to deal with viable troubled companies, making loan workouts more flexible and faster. Additionally, the new bankruptcy law will speed up the liquidation of non-viable companies, which will increase recovery amounts.

The law aims to tackle Egypt’s outdated bankruptcy procedures, which were not governed by specific law but instead processed in the courts on a case-by-case basis with debtors facing jail terms. Under the previous regime, the process was lengthy and bureaucratic, lacked the ability to affect a restructuring or reorganization of a viable businesses, and was without sufficient out-of-court options for debtors and creditors.

The new bankruptcy law allows for out-of-court company restructurings, permits a standstill on creditors that allow a viable company to reorganise and provides safety nets for creditors similar to US Chapter 11 bankruptcy protection. Courts also have the right to enforce a restructuring plan if a consensual solution is not reached. Under the new law, a restructuring plan must be completed within 60 days of filing for a standstill, although a judge has the right to extend that period. The bankruptcy law also reduces the liquidation period for a nonviable company to nine months, instead of the current average of more than two years.

The new law will allow borrowers and creditors to reach restructuring solutions more swiftly, increasing recovery amounts and improving banks’ ability to deal with problem loans. Egypt’s weak insolvency framework has been a drag on banks’ asset quality. Indeed, the country’s two largest banks, National Bank of Egypt SAE (B3 stable, b3 1) and Banque Misr SAE (B3 stable, b3), have taken more than 10 years to recover from legacy problem loans and reduce their aggregate ratio of nonperforming loans to gross loans to around two per cent as of June 2017 from more than 25 per cent a decade ago.

Egypt ranked 115th among 190 countries in the World Bank’s Resolving Insolvency Index in its 2018 Doing Business Report. Creditors in Egypt recover an average of 26 cents for every dollar lent, compared with 71.2 cents in countries that are members of the Organisation for Economic Co-operation and Development (OECD). Bankruptcy proceedings can take an average of 2.5 years, although anecdotal evidence points to longer actual time periods. By comparison, the bankruptcy duration is 1.7 years on average in OECD countries.

  

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