When secured and unsecured creditors recover the same: The emblematic case of the Tunisian corporate bankruptcies

Bankruptcy is an essential screening mechanism for developing economies. This paper focuses on the way bankruptcy is managed in Tunisia, a country characterized by the importance of its banking sector. We hand collected data on a set of Tunisian firms that went bankrupt between 1995-2009. We gathered original and unique information on the firms’ characteristics, the causes of default, the values of assets, the structure of claims, the recovery rates, and the bankruptcy costs. We use this information to answer several questions (those questions being investigated both directly, and by controlling for any risk of selection bias): 1) are the Tunisian bankruptcy procedures able to generate high total recoveries? 2) Are the secured creditors (mostly banks) well-enough protected under bankruptcy? 3) Do the secured creditors influence the choice between liquidation and reorganization? 4) To what extent the recoveries of the secured creditors compete (or not) with the ones of the other classes of creditors? We find that the Tunisian reorganization procedures are able to generate substantial recoveries, but those are mainly captured by the preferential claims (employees and public claims). This is coherent with the authorities’ willingness to improve social protection, but this raises concerns as the Tunisian firms are mainly financed by bankers. Our analysis shows that the secured creditors are poorly protected under bankruptcy: they rank almost last in the priority order of repayment, and their recovery rate is similar to one of the unsecured creditors. We also find that the rather high level of recovery rate is mainly attributable to the reorganization procedures. We finally find that the court’s choice between reorganization and liquidation is not influenced by the structure of claims. Thus, in Tunisia, the creditors are losing hand once bankruptcy is triggered. The likely consequences on development are twofold: first, higher risks of capital misallocation and of credit rationing; second, stronger incentives for the banks to prioritize informal workouts.