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

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

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

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  1. Corporate Restructuring After Systemic Crises:experiences and lessons from the past decade Michael Pomerleano and William Shaw World Bank

  2. 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

  3. Costs of crises high(percent of GDP) Source: Honohan and Klingebiel (2003)

  4. Vulnerabilities Leading to Crisis

  5. Vulnerabilities Leading to CrisisCorporate governance poor • Ties between corporates, government, and banks • Directed lending and misallocation of credit • Groups or families control economy

  6. Vulnerabilities Leading to CrisesWeak bankruptcy regimes raise costs(percent of estate) Source: World Bank

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. Need Mechanisms to Resolve Inter-creditorDisputes • 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?

  13. Market-based restructuring promising, but limited success Markets for distressed debt Corporate restructuring funds Corporate restructuring vehicles Securitization

  14. 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

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