Download Corporate Restructuring After Systemic Crises

Corporate Restructuring
After Systemic Crises:
experiences and lessons from the past decade
Michael Pomerleano and William Shaw
World Bank
Main Messages
Pre-crisis corporate vulnerabilities high
Corporate, bank restructuring intertwined
Strong legal systems, out of court workouts needed
Market-based restructuring promising, but success
limited
Costs of crises high
(percent of GDP)
60
50
40
Fiscal
30
Output
20
10
0
Indonesia Malaysia
Mexico
Poland
Source: Honohan and Klingebiel (2003)
Korea
Thailand
Vulnerabilities Leading to Crisis
Vulnerabilities Leading to Crisis
Corporate governance poor
• Ties between corporates,
government, and banks
• Directed lending and misallocation
of credit
• Groups or families control economy
Vulnerabilities Leading to Crises
Weak bankruptcy regimes raise costs
(percent of estate)
40
35
30
25
20
15
10
5
0
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Source: World Bank
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Delays in restructuring attributable to…
• Banks often ineffective at restructuring
– Recognizing losses means bank insolvency
– Sometimes personal liability for loss recognition
– Lack business expertise
• Governments often choose forbearance because:
– Lack of fiscal headroom
– Fear loss of confidence, systemic distress
Require corporate restructuring for bank
recapitalization
• Laissez-faire (Thailand) and
restructuring corporates after banks
restructuring (Turkey) failed
• Sticks and carrots essential
• Poland: Banks recapitalized if
acceptable restructuring plans
• Taiwan: Required resolution of NPLs
AMC success contingent on…
• Good governance and policies, transparency
• Purchasing loans at market prices; realization
of losses prior to purchase
• Rapid disposal of assets
• Engage private sector in asset disposition
• Employ menu of instruments
Quality of legal system critical to
restructuring
• Need credible threat of foreclosure,
liquidation, or receivership
• Judiciary weak or lacking capacity in
crisis countries
• Results in failure to apply law
consistently
Both Formal & Out-of-Court
Approaches Needed
Out-of-court workouts address capacity constraints
• Some segmentation desirable
– Focus resources on restructuring
the largest debtors
• Set of principles, time-bound
rules required
• Need credible threat of
liquidation
Need Mechanisms to Resolve
Inter-creditor Disputes
• Particularly with weak legal and
institutional frameworks
• Creditors can destroy value if hold out
for better terms
• Cash controls can safeguard creditor
rights
• Moral hazard?
Market-based restructuring
promising, but limited success
Markets for distressed debt
Corporate restructuring funds
Corporate restructuring vehicles
Securitization
Special Programs for Small and
Medium-Sized Enterprises
• Goal is to avoid inefficiencies, loss of
viable companies
• De facto restructuring of viable SMEs
not always efficient
• Systemic approach possible