Managing in Troubled Times

From 1996, most Asian economies suffered severe dislocation when markets crashed as a consequence of investors and consumers realising that asset prices were significantly overinflated. The Asian Crisis offers lessons to us today for managing in a chaotic market environment. This note is adapted from notes of an investment seminar in Bangkok, November 1997, close to the nadir of sentiment.

Restructurings and Workouts in Asia November 1997

Three overall themes are apparent:

Lack of information. Free, but confidential, flow of information among creditors, management and shareholders is critical to success. This may difficult because of the incestuous nature of business relationships in some economies.
Lack of management skill. There is a grave lack of experienced or even qualified professionals to implement restructurings, manage the evolving bureaucracy (judicial and accounting systems) or manage turnarounds in companies. All professional firms have and are importing professionals from overseas. Even if the administration chooses the right path in restructuring the economy and liquidating bad assets, there are not enough people to implement the changes. Firm management is generally inadequate to cope with the changes required.
Lack of funds. The cost of debt and implied cost of equity make any new funding very difficult to obtain. There is considered to be significant interest from distressed debt funds.

The current legal framework in Thailand (for example) poses some significant hurdles:

Unsecured loans made to a debtor when the creditor has knowledge of insolvency can not be claimed in subsequent bankruptcy proceedings. Even if the credit is secured, it may be unrecoverable according to this principle. The conceptual way to circumvent this is by structuring though a sale or lease to offer principal security.

Recent emergency decrees attempt to provide a mechanism for putting a company into administration. However, it is untested, takes up to six months to initiate and practically requires the consent of all creditors. Once effected it is still difficult to administer.

The current approach is a contractually agreed workout via a Creditor’s Committee which is outside the Ministry of Justice’s purview – this does not have any body of law on which to rely, has only been attempted by an estimated 15 companies over the past nine months and only with limited success. This may be challenged by “minority” creditors disagreeing with the approach adopted by the Committee. Problems arise because secured creditors find that their documentation is inadequate. The principal tool used to engage agreement is the threat of default.

Bankruptcy, if granted, generally treats all creditors equally and the petitioning creditor is liable for costs, thereby taking on a disproportionate burden. If a claim is in foreign currency, the exchange rate applied is that prevailing on the date of the receivership order, not settlement.

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