Countries and Regions

	Table of Contents
p. 17 of 17 BACK | NEXT Executive Summary Map I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues III. Selected Policy Issues A. Fiscal Sustainability B. Corporate Debt Restructuring

Country Economic Review: Thailand : III. Selected Policy Issues

---

B. Corporate Debt Restructuring

1. Background

64. Corporate debt amounted to about 150 percent of GDP at the end of 2000, which although below the peak level of 1998, is still larger than the level before the crisis.³⁴ The corporate debt to equity ratio declined in 2000 but is still higher than before the crisis at about 5 percent. Corporate sector returns as a ratio of total equity have improved in 2000 but are still lower than its precrisis level in 1996 (Table 16). Although foreign currency debt has come down and its maturity has lengthened but the nonperforming domestic debt on the balance sheets of commercial banks and the asset management companies still constitutes a serious threat to financial rehabilitation and economic recovery.

2. What Has Been Done: Then and Now

65. Thailand has followed a multi-pronged approach to debt restructuring, including (i) Financial Sector Restructuring Authority (FRA)-led workouts of NPLs, (ii) a voluntary framework for debt restructuring under Corporate Debt Restructuring Advisory Committee (CDRAC), (iii) corporate debt restructuring under bankruptcy laws, and (iv) the establishment of TAMC.

66. FRA–Led and Bank–Led Workouts of NPLs. FRA was established in October 1997 to oversee the rehabilitation or liquidation of assets of closed financial institutions during the crisis, amounting to B860 billion. FIDF³⁵ covered the losses, which then were converted into government debt, amounting to B776.2 billion at end-2000. Also, the Government recapitalized banks and finance companies. From 1998 until the first half of 2001, total recapitalization reached B964.6 billion.³⁶ These initiatives played an important role in stabilizing the financial system during the crisis. However this approach is believed to have imposed large fiscal costs, which eventually will devolve to taxpayers.

67. Voluntary Framework for Debt Restructuring under CDRAC. Facing coordination problems created by the presence of a very large number of debtors and creditors, and the inadequate bankruptcy system, the Thai Government pursued an out-of-court consensual approach to private sector debt resolution by establishing CDRAC in 1998. CDRAC is primarily responsible for mapping out debt restructuring measures in support of efficient negotiations between the private sector and financial institutions. CDRAC members have identified priority cases, developed a set of principles for voluntary restructuring based on the London Approach³⁷ and facilitated negotiations between creditors and debtors. A more contractual approach was initiated in January 1999 by setting up a CDRAC office at the BoT to track down progress on priority cases. By promulgating a model debtor-creditor agreement to manage out-of-court restructuring and establishing an inter-creditor agreement to resolve differences among creditors. Aside from its involvement in the debt restructuring of individual debtors, CDRAC has been helpful in negotiating with other government agencies to amend and relax rules for cases that have gone through its process.³⁸

68. CDRAC has made measurable progress in facilitating debt resolution. Corporate debt restructuring has made progress, with about 352,000 cases valued at B1,954 billion restructured by end of 2000, and another 76,000 cases involving B386 billion under negotiation. CDRAC continues to facilitate debt restructuring negotiation. About half of the cases managed by CDRAC reached a voluntary agreement between debtors and creditors by end of 2000. Most of the remaining cases have been sent to the civil courts for reorganization or liquidation.

69. However, CDRAC has encountered some difficulties such as resolution failures and referrals to the court system, and overreliance on restructuring without accompanying business reorganization. Having resolved the easier cases, the CDRAC process is now slowing down. Reasons for this include (i) ineffective bankruptcy proceedings; (ii) delays in converting unsuccessful rehabilitation into liquidation proceedings; (iii) slow foreclosure and some legal and tax obstacles that impede mergers and acquisitions; and (iv) both creditors and debtors are waiting for assets to be transferred on more favorable terms once TAMC opens up.³⁹

70. Court-Supervised Restructuring and Liquidation. Due to the antiquated nature of the then bankruptcy laws and processes, the Government undertook reforms of the insolvency and foreclosure system in 1998. Major reforms included amendment of Thailand's 1940 Bankruptcy Act to permit court-supervised reorganization as an alternative to liquidation, amendments to streamline court-supervised reorganizations, and changes to the Code of Civil Procedure to expedite foreclosures and the establishment of the Central Bankruptcy Court.

71. One important feature of these reforms is the establishment of the Central Bankruptcy Court, which is empowered to establish its own method of conducting and recording trials.⁴⁰ Under the Central Bankruptcy Court, major types of filing include business reorganization and liquidation. The volume of business reorganization increased significantly in 2000 but moderated during the first quarter of 2001 (Table 17). Liquidation followed a similar trend, 55 percent of the cases were from commercial wholesale/retail and personal consumption sectors. The World Bank concludes that the bankruptcy court is being used to collect smaller-sized debt, while larger rehabilitation cases do not enter the process.⁴¹ The insolvency framework remains biased against creditors, and bankruptcy courts are not proving effective in spurring voluntary debt resolution.⁴² A World Bank study indicated that it might take as long as eight years to complete the backlog of pending court cases at current court capacity.⁴³

72. To ensure that the courts work more effectively, the bankruptcy laws need to be amended to give creditors more clout. Without any credible threat of bankruptcy, debtors will have no incentive to negotiate debt restructuring. In addition, several legal and institutional obstacles should be removed or lessened. These obstacles include a shortage of experienced bankruptcy judges, weak insolvency criteria, and legal difficulties in removing weak corporate management and in implementing liquidation and foreclosure procedures.

73. TAMC framework for Debt Restructuring. To overcome the existing obstacles to debt restructuring and promote efficient management of NPLs, the new Government established TAMC in June 2001. The objective of TAMC is to foster economic recovery through the rapid resolution of NPLs, while supporting debtor’s efforts to reorganize. TAMC plans to acquire and manage about B1.3 trillion (about $30 billion) in book value of distressed assets. Over 80 percent of these assets consist of NPLs held by state-owned entities, with the remainder held by private banks (B230 billion, or $5 billion).⁴⁴ FIDF will provide initial capital and guarantee bonds issued by TAMC. TAMC will have the ability to borrow from the market. MOF is responsible for the general supervision of TAMC and the BoT has the power to examine its operations and financial performance. The bill empowering TAMC was approved in September 2001. It provided TAMC with special legal powers, including (i) debt restructuring including debt and debt service reductions, debt for equity swaps, and transfer of collateral; (ii) business reorganization, which could combine debt with operational restructuring; and (iii) the right to foreclosure and disposal of collateral. These special powers are expected to enable TAMC to bypass the existing slow judicial and administrative procedures.

74. The fiscal cost of TAMC is likely to be limited since much of TAMC's impaired assets are from entities already within the public sector, suggesting that these assets do not ultimately add to the long-term government debt burden. Any potential fiscal implications would stem from private loans purchased by TAMC. However, these loans are capped given the loss-sharing arrangement and the principle that banks will ultimately bear TAMC's interest and operational expenses.⁴⁵ Moreover, the impact of TAMC operations on private banks is likely to be limited because the aggregate share of private bank loans eligible for transfer in not large. Accordingly, the overall private bank distressed loan ratios are not likely to be much affected by the operation of TAMC.

75. To ensure the effectiveness, IMF has concluded that TAMC must: (i) make full use of private sector expertise in managing the assets under its purview; (ii) apply consistently the principle of value maximization in drawing up terms for debt and business restructuring; (iii) use its special legal powers in a consistent and even-handed manner; and (iv) minimize political interference and conduct operations transparently.⁴⁶

3. Conclusions

76. Thailand is now less financially vulnerable than before. However, debt overhang still represents a serious impediment to recovery and could threaten the rehabilitation of Thailand's financial system. Potentially, the newly established TAMC could act as an important catalyst for debt restructuring. Progress on debt restructuring would help increase the pool of healthy borrowers, revive active lending, and support domestic demand.

77. However, the current economic slowdown could pose a threat to the process of corporate debt restructuring. Slow growth will depress asset values and impair the ability of debtors to service their obligations. If growth picks up later in 2002, as is generally expected, this should provide a boost to the debt resolution process.

78. In addition to the measures noted, Thailand must now improve corporate governance standards to emerging markets good practice levels. Corporate debt is related to generally weak corporate governance. Poor accounting, auditing, and financial reporting practices compound the problem. To improve the transparency of corporate management, the Government is amending laws and strengthening regulations to enhance shareholder rights, adopting international accounting and auditing procedures, and ensuring better enforcement of regulations on corporate finance and management.

_______________________________________

Back A. Fiscal Sustainability	Country Economic Review: Thailand