Originally published in eurofenix - Winter 2012/2013.
David Conaway looks at alternative sources of working capital in US and Canadian insolvencies.
It has been reported that Wal-Mart, the world’s largest retailer and third largest company on the Fortune Global 2012 list, with annual turnover of almost $450 billion, has used trade credit as a larger source of working capital than short-term bank borrowings. As capital markets, the global economy, and industries evolve and change, lenders have been generally more aware of capital requirements and more restricted in their lending commitments. Business insolvencies continue to play a significant role in today’s business environment, as businesses utilize the special provisions of bankruptcy law to buy and sell distressed assets, shed unwanted contractual obligations, restructure balance sheets, resolve legacy obligations, and achieve reductions in workforce.
As lenders continue to be judicious about making loans, insolvency proceedings worldwide have experienced lower levels of financing provided by traditional loan arrangements. Not only are lenders more cautious about making loans, but the costs of lending to borrowers has made it more difficult to obtain. As a result, borrowers have more frequently turned to another source of borrowing, trade credit. In US and Canadian insolvency issues, there are statutory provisions and other authority that allow courts to facilitate such trade credit, including payment of prepetition claims to induce credit. However, these provisions are also viewed as “remedies” for suppliers to obtain payment of prepetition debt, which can add substantial administrative costs to insolvency cases.
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