Examining Corporate Debt Restructuring Schemes in Pacific Asia

Corporate debt restructuring scheme is one of the most preferred strategic for those financial distress companies to take advantage at a lower interest rate. It is a consultation process which involves a series meeting between the debtor and creditor. After that, it moves into the negotiation stage between both parties and then come to the contract stage. Before signing the contract, borrowing company must agree to the financial conditions, for instance, terms of the interest, terms of payment and so forth (Article, 2010). The objectives of corporate debt restructuring are to support continuing economic recovery, enable debtors to continue their business operations, and promote fair debt repayment to the creditors. Hence, it is including of debt rescheduling, interest rate reduction, debt for equity swaps and debt forgiveness (Makhija, 2008). However, this corporate debt restructuring considered as the final option for a company before it goes into insolvency. Besides that, there are three popular approaches of corporate debt restructuring scheme to restructuring the debt. The three approaches are centralized, decentralized, and London approach.

Government plays as a leading role in this centralized approach. This approach is only suitable for small size of debt and simple corporate structure. Moreover, this model is unsuitable because government is enjoys high levels of confidence while success cases in this approach for large debt complex restructuring was unknown. This approach was conducted in Sweden in the early of 1990 and Hungary in the mid of 1990 (Abd, 2000; Kolkata, n.d.).

The second approach, decentralized approach is more effective than the centralized approach. It is more appropriate for those companies which are experienced a large bad debts and complex corporate structure. This approach is an informal and a voluntary process without government involvement. United States was adopted this approach in 1990 (Abd, 2000).

Lastly, London approach was a non statutory and informal framework that introduced by the Bank of England in 1990 to handle insolvency. During 1990 recession, more than 160 British companies were conducted London approach (Abd, 2000). London approach encourages creditors in out of court agreements by follow certain principles. The principles are minimized losses to creditors, avoid unnecessary liquidation of viable debtors, and offer continued financial support to viable borrowers (Claessens, n.d.). It tends to rescue a financial distress companies as going concern instead of forcing them into a formal insolvency (Laryea, 2010).

Besides that, many Asian countries that had been affected by the Asian financial crisis have practised the corporate restructuring scheme which is similar to London approach. Those countries are Indonesia, Korea, Thailand and Malaysia.

2.4.1 Korea

Korea adopted corporate restructuring coordination committee to mediate the disputes between debtors and creditors. Corporate Restructuring Coordination Committee works under the powerful of Financial Supervisory Commission in Korea while it was established in 1998. CRCC workout process was followed to the London approach which is out of court resolution of financial restructuring cases. (Krause, 2000; Pomerleano & Shaw, 2005).

According to Chan (2002), there are two main causes of the corporate sector inefficiency for Korea to implement corporate debt management and restructuring at the onset of the financial crisis. The first causes was Korea manufacturing firms experienced cash flow shortage due to the excessive and inefficient investment, high leveraged and diversified businesses were financed by debts. Second, non performing loan was burdened the corporate sector and lead to the increasing number of bankruptcies.

According to Chan (2002), Corporate Restructuring Coordination Committee had success in lowering the debt to equity ratio and improving interest coverage ratio of the corporate sector after Asian financial crisis. Besides that, the GDP growth rate recovered, interest rate decreased to 5.4 percent from over 19.0 percent, and unemployment rate dropped to 2.7 percent from 6.8 percent after the Asian financial crisis. The improvement has shown that the corporate restructuring contributed significantly to Korea rapid economic recovery. Moreover, due to the economic recovery, Korea was able to repay their IMF loans in August 2001 which is two years and eight months earlier then originally scheduled. However, non performing loans in Korea had significantly decreased from 88.6 percent in 1997 to 24.0 percent in 2001. Debt to equity ratio had trended down from around 4 in 1997 to about 2 in 2001, while interest coverage ratio also had improved (Worldbank, 2002). Thus, resolution of corporate debts in Korea has been satisfy and successful.

2.4.2 Thailand

Corporate Debt Restructuring Advisory Committee was formed in June 1998 under the Bank of Thailand. CDRAC was created to mediate formal out of court workouts of non performing loans. However, Thailand was adopted Bangkok approach which is administered by CDRAC. Bangkok approach is a non binding and non statutory guidelines for efficient restructuring of corporate debt for benefits of creditors, debtors, employees, shareholders and Thai economy (Chanyarungrojn, 1999; Nashville & Tennessee, 2004).

According to Yupana, (2004) debt ratio increased for both business group and non group firms after the Asian financial crisis. For business group firms, the average debt to asset ratio increases from 40 percent in 1996 to 54 percent in the end of 1997. Besides that, the average ratio of total debt to total capital increases from 50 percent in 1996 to 66 percent in 1997. The average ratio of interest coverage ratio also had decreased from 11.65 percent in 1996 to 2.94 percent in 1997. Thus, the profits of business group firms had decreased significantly.

CDRAC was restructured totalling of Baht 2.6 trillion in August 1999, while among them, 700 cases were large distressed loans that exceeded baht 500 million. However, CDRAC completed restructured of totalling Baht 1.1 trillion at the end of 2000. Besides that, about 400 non financial companies shown that the corporate debt ratio was declined from 3.2 percent in 1997 to 2.04 percent in the mid of 1999. Generally, corporate debt restructuring was quite effective.

2.4.3 Indonesia

Indonesia government established the Indonesian Bank Restructuring Agency in January 1998 as an independent body to restructure troubled banks and their assets. Indonesian then created Jakarta Initiative in September 1998 to complement the Indonesia Debt Restructuring Agency and amended bankruptcy law. It is a London approach based principles as it involved informal framework that encouraged out of court debt workouts between the debtors and creditors (IMF, 2000; Adams & Mathieson, 1999).

According to Halim (2000) corporate debt restructuring is one of the important element for economic recovering, however, Indonesia Debt Restructuring Agency has not been successful. Corporate Indonesia is still highly leveraged even after the restructuring process. Debt to equity ratio is remained higher among the restructured firms. A sample of 34 cases which involved the debt of US$8 billion showed that 59 percent were resolved by using the combination of reduced interest rates. Most of the company workout only rescheduled debt, rather than improving internal operations or significantly reducing leveraging (Dfat, n.d.).

2.4.4 Malaysia

Malaysia government had come out a new strategy in the mid of 1998 to solve the financial restructuring of banking sectors and corporate sectors. The strategy comprises of three agencies, which is Danaharta, Danamodal and Corporate Debt Restructuring Committee. Danaharta and Danamodal are considered as statutory options, while CDRC is considered as non statutory option (Rajandram, 1999). CDRC is similar to the London approach as it helped to renegotiate and restructure those distress companies with out of court resolution.

CDRC had received 75 applicants of restructuring plan in 2000. However, CDRC had resolved 33 cases which are worth RM25.5 billion, while 12 cases worth RM11 billion remained outstanding at the end of 2000. Besides that, the debt of these 33 companies, RM4.6 billion were settled through cash payments, RM4.6 billion in bonds, and RM3.99 billion in financial notes. Thus, the non performing loan had decreased as part of these loans had been turned into performing loans (Aslam, 2005).

The success of the out of court debt restructuring strategies depends on the credibility of the mediator and the cooperation among all the parties that involved in the restructuring scheme.

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