Corporate restructuring

1
Corporate restructuring

• The Banks experience in Bolivia

2
The FSAP diagnosis of 2002 highlighted deep
fragilities in bank loan portfolios
3
which banks had addressed with loan
reprogramming exclusively

• Incentivized by government programs supporting
  loan reprogramming
• By Feb. 2002, 36 of loans had been reprogrammed
  (up to 50 for some banks)
• 20 of them were non-performing soon after (up to
  65 for some banks), compared to 21 NPLs in
  total loan portfolios
• Yet, new regulation allowed for better risk
  classification.

4
because their tight capital situation did not
enable any loss taking
And, relaxation of prudential norms enabled them
to hide inevitable losses
5
As to corporations, they had no incentives to
restructure

• Strong over-leveraging of balance sheets due to
  over-optimism during boom
• Most firms with limited prospects, low management
  skills and obsolete technologies hence most
  should exit the market
• But, bankruptcy process entails stigma of fraud,
  and banks cannot afford the associated losses
• In addition, history of government bail out
• And, fear of loss of control over family
  businesses.
• Hence, stand-still situation where everyone waits
  for a bail out and refuses to take its share of
  losses
• Leads to no new lending, and thus to low economic
  growth, in turn penalizing performing companies

6
The government hoped that economic re-activation
would do the trick

• The GoB hoped that higher economic growth would
  save most companies, improve loan quality and
  bank health
• Hence, they offered incentives for banks to grow
  their loan portfolios
• more time to meet provisioning standards
• This had a perverse impact on banks
• Well managed banks find no healthy new loan
  opportunities and therefore had to provision
  fully
• Ailing banks increased their loan portfolios
  (with ailing borrowers) and were granted more
  time to adequately provision their bad loans
• and on companies
• Ailing companies found new loans, delaying
  bankruptcy treats.

7
Instead, the WB proposed a systemic crisis
management framework
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based on a comprehensive package of reforms
(part of a FSAC)

• Establishment of Systemic Restructuring Team at
  highest level
• Ongoing reform of bankruptcy code, to allow
  faster company exits
• Remove presumption of fraud
• Remove need to obtain unanimous approval of a
  reorganization plan by all privileged creditors
  (tax, labor, and secured claimants)
• Fasten bankruptcy process
• Train judges.
• New law passed in July 2003 to enable voluntary
  workouts
• Creation of two funds
• For bank re-capitalization available when
  capital inadequacy results from
• The absorption of a failed bank
• Loan losses resulting from corporate
  restructuring
• For corporate re-capitalization and lending (with
  CAF) available to viable companies participating
  to corporate restructuring process.
• Creation of Superintendence of Companies in
  August 2003

9
Despite these significant efforts, corporate
restructuring is slow to start

• Less than 10 cases of voluntary corporate
  restructuring processes
• Less than half involving viable companies
  (including the largest employer in Bolivia)
• But, all banks are involved.
• Remaining obstacles
• Lack of incentives to motivate the start of
  negotiations among parties
• Unwillingness by companies to become transparent
• Inability to restructure the debt of individuals
  and unregistered small businesses
• Remaining uncertainties in legal framework
• Inadequate training of judges and arbitrators
• Insufficient publicity on capitalization funds.

10
To encourage more corporate restructuring, the
Bank will sponsor a dedicated workshop

• Targeted at all parties involved in corporate
  restructuring processes (borrowers, banks,
  minority creditors, judges, arbitrators,
  authorities, labor representatives, )
• With international experts
• With concrete successful examples from the region
  (Colombia, Peru)
• With dedicated sessions for each group of
  attendees, addressing in particular the remaining
  obstacles
• With TA sessions for banks and the authorities.