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Corporate Restructuring
After Systemic Crises:
experiences and lessons from the past decade
Michael Pomerleano and William Shaw
World Bank
Presented at World Bank conference on
“Corporate Restructuring: International Best
Practices”
March 22-24, 2004, Washington, DC
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
Crises difficult to predict
• Early warning systems vary
• Variety of macroeconomic
indicators used
• Evaluating corporate sector
vulnerability difficult
• Contingent claims approach
Corporate governance poor
• Ties between corporates,
government, and banks
• Directed lending and misallocation
of credit
• Groups or families control economy
Weak bankruptcy regimes raise costs
(percent of estate)
40
35
30
25
20
15
10
5
0
g.
r
A
i
z
a
Br
l
ch
e
Cz
n.
o
d
In
Source: World Bank
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Ko
M
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a
al
M
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Th
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Tu
Banks often ineffective at restructuring
•
•
•
•
Recognizing losses means bank insolvency
Personal liability for loss recognition
Lack business expertise
Governments need to force loss recognition,
but often choose forbearance because:
– Fear loss on deposit guarantees
– Fear loss of confidence, systemic distress
Lessons Learned
from Recent Crises
Require corporate restructuring for bank
recapitalization
• Poland: Recapitalized if acceptable
restructuring plans
• Malaysia: Recapitalized if resolve
or sell NPLs above 10 percent of
loans
AMC success needs right policies
• AMCs used for different purposes
• AMCs can improve efficiency of
restructuring
• Purchase loans at market prices
• Separate corporate restructuring from
bank recapitalization
• Dispose of assets rapidly
Quality of legal system critical to
restructuring
• Need credible threat of foreclosure,
liquidation, or receivership
• Judiciary weak in crisis countries
• Results in failure to apply law
consistently
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
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
Interventions can mitigate crisis
• Market improvements
– Develop market for distressed corporate
debt
– Encourage special restructuring funds
• Assist out of court agreements
Oversee restructuring of large firms
Require leverage ratio reductions
NPLs have fallen
(NPLs as percentage of total loans)
70
60
50
Indonesia
Malaysia
Thailand
Korea
40
30
20
10
0
1999
2002
Leverage trends diverge
(ratio of debt to equity of nonfinancial corporations)
7
6
5
Indonesia
Korea
Malaysia
Thailand
4
3
2
1
0
1997
2000
Policy lessons, law and
regulation
• Establish centralized system to monitor
financial and corporate sectors
• Avoid discrimination in tax and
accounting rules
• Strengthen bankruptcy rules
• Promote transparency and governance
Policy Lessons, dealing with
crisis
• Government intervention essential to
resolve systemic corporate crises
• Capacity constraints are critical
• Force banks to recognize losses
• AMCs dispose of assets, not
restructure
• Promote market-based approaches