Workouts and Restructurings In Malaysia Presented by: C' Rajandram Chairman, Corporate Debt Restruct

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Workouts and RestructuringsIn MalaysiaPresented
byC. RajandramChairman,Corporate Debt
Restructuring CommitteeMalaysia
INSOLVENCY SYSTEMS IN ASIA AN EFFICIENCY
PERSPECTIVE

• Hotel Inter-Continental,
• Sydney, Australia
• 29 November 1999

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Pre-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

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The 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

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New 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)

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New 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

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New Agencies For Restructuring

• Danamodal
• Special purpose company established in August
  1998
• Objective
• Recapitalised and strengthen banking institutions

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New 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

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Co-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
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Interplay 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

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Interplay 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

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Issues and Challenges

• Pace and depth of corporate restructuring
• Transparency and moral hazard problems
• Freezing of credit facilities for distressed
  companies

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Issues 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

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Issues 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

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Issues 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?

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Issues 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

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Issues 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

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The 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

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The 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

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Thank you.