Title: Workouts and Restructurings In Malaysia Presented by: C' Rajandram Chairman, Corporate Debt Restruct
1Workouts and RestructuringsIn MalaysiaPresented
byC. RajandramChairman,Corporate Debt
Restructuring CommitteeMalaysia
INSOLVENCY SYSTEMS IN ASIA AN EFFICIENCY
PERSPECTIVE
- Hotel Inter-Continental,
- Sydney, Australia
- 29 November 1999
2Pre-Crisis Period
- Economic expansion was largely funded by debts
obtained from the banking sector - Funding mismatch for privatisation and large
scale infrastructure projects - Corporations were more concern with their
Earnings Per Share (EPS) instead of cash flow
adequacy
3The Economic Crisis
- Sharp depreciation of the Ringgit against the US
Dollars - Stock market indices took a nosedive
- Many corporations seek court protection under
Section 176 of the Companies Act 1965 during the
first half of 1998
4New Agencies For Restructuring
- The Malaysian Government initiated a new
infrastructure to speed up financial and
corporate restructuring - Pengurusan Danaharta Nasional Berhad
(Danaharta) - Danamodal Nasional Berhad (Danamodal)
- Corporate Debt Restructuring Committee (CDRC)
5New Agencies For Restructuring
- Danaharta
- Established by way of legislation in June 1998
- Objective
- Removal of NPLs with size of above RM5 million
(US1.32 million) from the banking sector - Maximise recovery of NPLs through longer funding
structure
6New Agencies For Restructuring
- Danamodal
- Special purpose company established in August
1998 - Objective
- Recapitalised and strengthen banking institutions
7New Agencies For Restructuring
- CDRC
- Established in October 1998 under Bank Negara
Malaysia (Central Bank of Malaysia) - Set-up follows the London Approach where debts
are restructured on an informal basis - Does not have any legal powers
- Assist in restructuring of large corporate debts
in excess of RM50 million (US13.16 million) - Also undertaking wider scale industry studies to
evaluate possible industry solution
8Co-ordination Flow
New capital
Corporate Sector
New loans
Banking Institutions
Danamodal (Banks Recapitalisation)
Rehabilitate borrower
Restructure debts
Issue bonds
Sell NPL at fair value
Cash
CDRC (Loan Restructuring)
Danaharta (NPL Resolution)
Investors
Issue bonds
3
9Interplay Between Formal and Informal Workouts
- CDRC is one of the many parties involved in debt
restructuring - Malaysias company laws are inherited from the
British and Australian model in the 1960s - All creditors are adequately protected by the
comprehensive insolvency and liquidation laws - Most important in debt restructuring is Section
176 of the Companies Act 1965 - Companies can only seek court protection if the
application are supported by the creditors
10Interplay Between Formal and Informal Workouts
- CDRC framework is an informal process where
creditors and debtors meet as opposed to the
formal Section 176 - A three-month standstill period between the
creditors and debtors is usually required for a
scheme to be proposed - The proposed scheme would be scrutinised by the
company, creditors as well as CDRC - Once a scheme is agreed by all stakeholders, the
restructuring is formalised by an agreement
11Issues and Challenges
- Pace and depth of corporate restructuring
- Transparency and moral hazard problems
- Freezing of credit facilities for distressed
companies
12Issues and Challenges
- Pace and Depth of Corporate Restructuring...
- Difficult to find consensus on how fast or
extensive financial and corporate restructuring
should be - CDRC being criticised for being slow without
realising that CDRC is purely a mediator with no
legal powers - Amicable solutions are often unique to the nature
of debtor and creditor
13Issues and Challenges
- Pace and Depth of Corporate Restructuring
- Liquidation is not always the solution
- Other innovative mechanism to resolve corporate
distress should be explored to ensure corporate
sector, labour market and social fabric do not
suffer unnecessary dislocation and disruption - Therefore, there is a need to strike a balance
between speedy resolution and unnecessary
dislocation and disruption
14Issues and Challenges
- Bailouts, Moral Hazards and Transparency
Issues... - Does the path of corporate restructuring in
Malaysia leads to moral hazard later on? - Would penalising shareholders and managers ensure
similar mistakes are not repeated?
15Issues and Challenges
- Bailouts, Moral Hazards and Transparency
Issues... - We believe these issues are not of major
importance because - the burden of adjustment and restructuring risks
are shared among creditors and debtors - underlying principles adopted by CDRC is that the
debt resolution process and decisions should be
private sector and market-driven
16Issues and Challenges
- Freezing of Credit Lines...
- Common problem Freezing of credit lines and
reluctance of banks to provide new funding - To resolve this problem, the CDRC is faced with
several challenges - 1. Enlist creditors support for the
restructuring scheme - 2. Secure additional funding for debtor companies
to complete project which are deemed to be
viable and - 3. Ensure deadlines are met by both creditors and
debtors
17The Way Forward
- CDRCs job has been made easier because of the
relative stability in our domestic financial
markets and low interest rate policy - Downward price adjustment of assets particularly
land does not pose much valuation problem - The upturn in economic activities and stock
market are expected to relieve financial distress
of corporations - The improving economic conditions would enable
creditors and debtors obtain better solution than
otherwise possible
18The Way Forward
- Without a mature bond market, economic expansion
was funded almost entirely by the banking sector - Diversify risks away from the banking system
through the development of the bond market - Two major incentives have been introduce recently
to accelerate corporate restructuring - Exempt all instruments involved in corporate debt
restructuring from stamp duty. This is a saving
of up to 4 of transaction amount and - Non-revenue expenses incurred are allowed to be
deducted for income tax computation
19Thank you.