When the company that runs much of the public bus system in Santiago, Chile, said this month that it could not pay its bills because of a decline in ridership and a tendency for a large percentage of its passengers to skip paying their fares, it decided to file for bankruptcy.
That in itself would not necessarily be noteworthy outside of Chile except for where the company, Inversiones Alsacia, decided to file: New York.
Why would a foreign corporation want to file for bankruptcy in the United States? After all, Chile has its own bankruptcy laws.
As it happens, this is something that Oscar Couwenberg, an economist at the University of Groningen in the Netherlands, and I recently set out to answer. We gathered up all of the recent instances we could find of foreign corporations that filed for bankruptcy in the US from 2005 to 2012.
We ended up with 231 cases that were filed in the Federal Bankruptcy Court for the Southern District of New York and 64 cases that were filed in Delaware. We found a total of 316 cases, but most were filed in the two courts.
Inversiones Alsacia is consistent with that. Its case is being heard by Judge Martin Glenn in Manhattan.
In our paper, we explain the advantage foreign companies have when filing for bankruptcy in the US. Most important, many debtors are really corporate groups, rather than single corporations. When the group is made up of corporations from different jurisdictions, it becomes difficult to keep the group together if each corporation has to file a bankruptcy petition in their home countries.
One solution is to file a case in a financial centre, regardless of where the debtors are. This binds the big institutional creditors to the bankruptcy plan, wherever the debtors might be.
New York fits the bill in that regard. It also explains why so many European companies reorganise under English law, even though they have little presence there.
Moreover, the US is attractive because its bankruptcy code contains language that says a filing creates a bankruptcy estate made up of all property, "wherever located". That broad sweep is paired with a provision that allows a bankruptcy case to be filed by "a person that resides or has a domicile, a place of business, or property in the US." The latter factor - having property in the US - has been interpreted to include a bank account in the country. (In the case of Inversiones Alsacia, it cited seven bank accounts in New York.)
Thus, it is relatively easy to qualify as a debtor as long as it is able to move some cash into the country. The bankruptcy code, meanwhile, applies to all of the debtor's property, "wherever located," even outside the country. If the debtor's creditors are primarily financial institutions, which most likely have ties to New York and perhaps other parts of the country, too, the bankruptcy court can realistically expect to enforce its decisions.
On the other hand, Inversiones Alsacia looks like an operation based entirely in Chile - after all, the Santiago buses don't take international trips, right?
But a review of the company's disclosure statement shows that it has issued a bale of bond debt that has been guaranteed by several companies in the larger corporate group.
Most are Chilean, but one is from Bermuda. Most of the big holders, on the other hand, appear to be American asset managers.
Could a Chilean bankruptcy court restructure a Bermudan company in a way that binds American creditors?
I'm betting nobody knows, and that helps account for the flight to more certainty in the United States. It is a trend that will most likely increase.
That in itself would not necessarily be noteworthy outside of Chile except for where the company, Inversiones Alsacia, decided to file: New York.
Why would a foreign corporation want to file for bankruptcy in the United States? After all, Chile has its own bankruptcy laws.
As it happens, this is something that Oscar Couwenberg, an economist at the University of Groningen in the Netherlands, and I recently set out to answer. We gathered up all of the recent instances we could find of foreign corporations that filed for bankruptcy in the US from 2005 to 2012.
We ended up with 231 cases that were filed in the Federal Bankruptcy Court for the Southern District of New York and 64 cases that were filed in Delaware. We found a total of 316 cases, but most were filed in the two courts.
Inversiones Alsacia is consistent with that. Its case is being heard by Judge Martin Glenn in Manhattan.
In our paper, we explain the advantage foreign companies have when filing for bankruptcy in the US. Most important, many debtors are really corporate groups, rather than single corporations. When the group is made up of corporations from different jurisdictions, it becomes difficult to keep the group together if each corporation has to file a bankruptcy petition in their home countries.
One solution is to file a case in a financial centre, regardless of where the debtors are. This binds the big institutional creditors to the bankruptcy plan, wherever the debtors might be.
New York fits the bill in that regard. It also explains why so many European companies reorganise under English law, even though they have little presence there.
Moreover, the US is attractive because its bankruptcy code contains language that says a filing creates a bankruptcy estate made up of all property, "wherever located". That broad sweep is paired with a provision that allows a bankruptcy case to be filed by "a person that resides or has a domicile, a place of business, or property in the US." The latter factor - having property in the US - has been interpreted to include a bank account in the country. (In the case of Inversiones Alsacia, it cited seven bank accounts in New York.)
Thus, it is relatively easy to qualify as a debtor as long as it is able to move some cash into the country. The bankruptcy code, meanwhile, applies to all of the debtor's property, "wherever located," even outside the country. If the debtor's creditors are primarily financial institutions, which most likely have ties to New York and perhaps other parts of the country, too, the bankruptcy court can realistically expect to enforce its decisions.
On the other hand, Inversiones Alsacia looks like an operation based entirely in Chile - after all, the Santiago buses don't take international trips, right?
But a review of the company's disclosure statement shows that it has issued a bale of bond debt that has been guaranteed by several companies in the larger corporate group.
Most are Chilean, but one is from Bermuda. Most of the big holders, on the other hand, appear to be American asset managers.
Could a Chilean bankruptcy court restructure a Bermudan company in a way that binds American creditors?
I'm betting nobody knows, and that helps account for the flight to more certainty in the United States. It is a trend that will most likely increase.
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