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What are the key factors that affect creditor recovery rates in liquidation?

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When a company goes bankrupt and enters liquidation, its assets are sold to pay off its debts. However, not all creditors are equally likely to recover their claims. As a technical analyst, you need to understand the key factors that affect creditor recovery rates in liquidation, especially if you are involved in distressed debt investing or corporate restructuring. In this article, we will discuss some of these factors and how they influence the expected returns and risks of different classes of creditors.

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Narasimha Prasad G.S.

Insolvency Professional (IP) & Consultant Trainer

1 Priority of claims

One of the most important factors that affect creditor recovery rates in liquidation is the priority of claims. This refers to the order in which creditors are paid from the proceeds of the asset sale, according to the legal and contractual rights of each creditor. Generally, secured creditors have the highest priority, followed by unsecured creditors, and then shareholders. Within each category, there may be further subdivisions, such as senior and junior debt, or preferred and common stock. The higher the priority of a claim, the higher the likelihood and the amount of recovery in liquidation.

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Narasimha Prasad G.S.

Insolvency Professional (IP) & Consultant Trainer
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An important factor. A few points to note in this regard are: 1. If a secured creditor has preferred to exercise exclusive rights over assets charged to them through other means, the scene can change for other creditors, 2. Speed of decision making on offers received for assets is a critical factor for unsecured creditors, who as such, rank lower in priority and lower chance of recovery in value terms.

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2 Asset quality and value

Another factor that affects creditor recovery rates in liquidation is the quality and value of the assets that are sold. This depends on the nature, condition, and marketability of the assets, as well as the timing and method of the sale. For example, tangible assets, such as equipment and inventory, may be easier to sell than intangible assets, such as goodwill and patents. Similarly, assets that are in good shape and have high demand may fetch higher prices than assets that are obsolete or damaged. The timing and method of the sale also matter, as a hasty or forced sale may result in lower recovery rates than a planned or negotiated sale.

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Narasimha Prasad G.S.

Insolvency Professional (IP) & Consultant Trainer
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Arguably the most critical factor. In addition, the timing of sale is a tricky factor - while hasty sale can result in lower recovery, delayed sale expecting higher relation may result in value erosion due to several factors.

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3 Cost of liquidation

A third factor that affects creditor recovery rates in liquidation is the cost of liquidation. This refers to the expenses incurred in the process of winding up the company and distributing the proceeds to the creditors. These expenses may include legal fees, administrative fees, accounting fees, taxes, and other charges. The cost of liquidation reduces the amount of money available for the creditors, and therefore lowers their recovery rates. The cost of liquidation may vary depending on the complexity, duration, and jurisdiction of the liquidation process.

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4 Creditor coordination and negotiation

A fourth factor that affects creditor recovery rates in liquidation is the level of coordination and negotiation among the creditors. This refers to the extent to which the creditors cooperate or compete with each other to maximize their recovery rates. For example, some creditors may form a committee or a consortium to act as a unified voice and bargain with the company or other creditors. Alternatively, some creditors may pursue individual actions or litigation to enforce their claims or challenge the priority of other claims. The outcome of creditor coordination and negotiation may affect the distribution and timing of the recovery rates.

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Narasimha Prasad G.S.

Insolvency Professional (IP) & Consultant Trainer
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Coordination among the creditors is a critical factor for better realisation. Lack of understanding and appreciation of mutual objectives and strategies among the creditors and the liquidator can result significant value erosion for all the creditors.

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5 Market conditions and expectations

A fifth factor that affects creditor recovery rates in liquidation is the market conditions and expectations. This refers to the external factors that influence the demand and supply of the assets and the claims of the company. For example, macroeconomic factors, such as interest rates, inflation, and growth, may affect the valuation and liquidity of the assets and the claims. Similarly, industry factors, such as competition, regulation, and innovation, may affect the profitability and viability of the company and its assets. The market conditions and expectations may also affect the behavior and sentiment of the creditors, as they may adjust their risk appetite and discount rates accordingly.

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6 Recovery rate estimation and analysis

A sixth factor that affects creditor recovery rates in liquidation is the recovery rate estimation and analysis. This refers to the methods and tools used by the creditors and the analysts to forecast and evaluate the potential recovery rates in liquidation. For example, some creditors and analysts may use historical data, comparable cases, or industry benchmarks to estimate the recovery rates. Alternatively, some creditors and analysts may use scenario analysis, sensitivity analysis, or Monte Carlo simulation to assess the range and probability of the recovery rates. The recovery rate estimation and analysis may affect the decision making and strategy of the creditors and the analysts, as they may use them to price, trade, or hedge their claims.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the key factors that affect creditor recovery rates in liquidation?

1

2

3

4

5

6

7

1 Priority of claims

2 Asset quality and value

3 Cost of liquidation

4 Creditor coordination and negotiation

5 Market conditions and expectations

6 Recovery rate estimation and analysis

7 Here’s what else to consider

Technical Analysis

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What are the key factors that affect creditor recovery rates in liquidation?

1

2

3

4

5

6

7

1 Priority of claims

2 Asset quality and value

3 Cost of liquidation

4 Creditor coordination and negotiation

5 Market conditions and expectations

6 Recovery rate estimation and analysis

7 Here’s what else to consider

Technical Analysis

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