Corporate Restructuring After Systemic Crises: experiences and lessons from the past decade

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Corporate Restructuring After Systemic
Crisesexperiences and lessons from the past
decade

• Michael Pomerleano and William Shaw
• World Bank

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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

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Costs of crises high(percent of GDP)
Source Honohan and Klingebiel (2003)
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Vulnerabilities Leading to Crisis
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Vulnerabilities Leading to CrisisCorporate
governance poor

• Ties between corporates, government, and banks
• Directed lending and misallocation of credit
• Groups or families control economy

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Vulnerabilities Leading to CrisesWeak bankruptcy
regimes raise costs(percent of estate)
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

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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

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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

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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

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Both Formal Out-of-Court Approaches
NeededOut-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

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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?

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Market-based restructuring promising, but limited
success

• Markets for distressed debt
• Corporate restructuring funds
• Corporate restructuring vehicles
• Securitization

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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