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Thailand Revival of the Corporate Sector

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					                               ASEM Trust Fund for the Asian Financial Crisis
                                  Implementation Completion Summary

                           Thailand: Revival of the Corporate Sector
                                          ASEM Trust Fund No. 020608

Development objective:

    To accelerate restructuring of non-performing loans (NPLs) through building the capacity of the private sector and a key
    government agencies, the Corporate Debt Restructuring Advisory Committee of the Bank of Thailand.

Linkage to the Asian Crisis:

    Accelerating the resolution of non-performing loans is integral to resolving the Asian crisis, as it is a key factor in the
    recapitalization of financial institutions, enhancing corporate reform, enhancing corporate governance and minimizing
    the fiscal impact of the crisis. These factors, in turn, are closely monitored by domestic and international investors and
    are key to rebuilding confidence in Thailand’s recovery.

Management and Execution:

    The project was co-managed in Headquarters by Ijaz Nabi, Lead Economist, and in the Bangkok Resident Mission by
    Magdi M. Amin, Economist. The project was World Bank Executed at the request of the Government.

Background and Rationale:

    A combination of poor capital structures, poor asset utilization, and declining demand undermined the profitability of the
    Thai corporate sector from 1996 through the third quarter of 1998. At the peak of the crisis, over 47% of borrowers,
    representing over 2.73 trillion baht of debt, were not performing on debt obligations. The problem existed in all sectors
    of the economy, and in all size strata. The World Bank committed to supporting the Thai authorities through the Tokyo
    Pledge, and a resulting series of structural adjustment loans. The initial concept for the project was an outcome of the
    policy dialogue with the Government in the course of preparing the second Economic and Financial Adjustment Loan,
    prepared in the second half of 1998. Through this dialogue, Thailand determined to take a market-oriented approach to
    restructuring – intervening failed institutions and offering public capital support on a voluntary basis, but allowing the
    financial sector to raise tap private capital markets and work out debt through market mechanisms. It was realized
    through this dialogue, conducted both with the Government and private institutions such as the Federation of Thai
    Industry, the Thai Bankers’ Association, and the Foreign Banks’ Association, that the success of this strategy would be
    determined both by the strength of the policy framework and the capacity of private sector participants. The
    Government formed a specialized government institution to facilitate the corporate restructuring process, the Corporate
    Debt Restructuring Advisory Committee (CDRAC) within the Bank of Thailand. Decisions on capacity building needs
    were informed by international experience a high-level policy conference, Thailand’s Dynamic Economic Recovery and
    Competitiveness, held in Bangkok in May 1998.

    ASEM Trust Fund support was sought to strengthen Thailand’s capacity to address corporate distress by: (i) providing
    technical assistance and policy advice to help address some of the key policy issues of concern to Thai authorities as
    they arose, (2) to improve the skills of Thailand’s financial sector and corporate sector participants in the corporate
    restructuring and workout processes, and (3) to broaden awareness of the corporate restructuring process in the corporate
    sector. As the project progressed, it was realized that specialized attention was required in a number of additional areas.
    Tax implications of corporate restructuring would need to be broadly understood, state-owned enterprises would need
    specialized treatment, the process of legal documentation of a large number of transactions would need to be accelerated,
    and State-owned bank employees who feared prosecution for incurring losses would need specialized guidelines
    “approved” by the state. All of these issues would need to be addressed within a short time of their identification, given
    the high cost of carrying non-performing debt and the potential fiscal impact of asset deterioration. The Task
    Management therefore focused initially on rapid capacity building, working through the three primary stakeholders to
    restructuring: creditors, debtors, and the Bank of Thailand. Over time, the ASEM TF Grant was used to address the
    narrower and more complex problems.
Subprojects Undertaken with support of the ASEM Trust Fund

1.   Corporate Debt Restructuring Advisory Committee of the Bank of Thailand. The ASEM TF Grant provided a team
     to improve the monitoring of distressed corporates as they move through the process of debt restructuring. Consulting
     services aimed to design, develop and deploy a systematic process by which the CDRAC could obtain meaningful
     information on the progress of voluntary corporate restructuring in Thailand. This project included capacity building for
     the CDRAC staff in corporate restructuring, and provided a tax manual on corporate restructuring distributed to all banks
     and many debtors.

2.   Training For Workout Departments Of Thai Banks and Finance Companies The objective of consulting services
     was to enhance the professional capacity of Thai banks and finance companies to undertake corporate restructuring.
     Funds were used to provide an intensive training program for the workout departments of Thai-owned banks, finance
     companies, and Thai financial advisors. The training was interactive and case study driven, focusing on the
     development of standardized approaches to common restructuring problems faced in Thailand. The funds were also
     used to provide a pilot mediation exercise for CDRAC, through which mediation services were tested on four
     restructuring cases. All four progressed considerably, with one of the four reaching resolution.

3.   Increasing Awareness Of Corporate Restructuring In The Thai Business Sector. The consulting services were
     directed to increase the speed of corporate restructuring in Thailand by informing Thai corporates of the basic principles,
     purpose and value of corporate restructuring. The Federation of Thai Industries, with the support of the Corporate Debt
     Restructuring Advisory Committee (CDRAC) and the World Bank delivered seminars in seven regional centers,
     attended by over 400 managers. A restructuring manual was developed which will reach over 2,000 firms.

4.   Assessment of financial situation of state enterprises. In depth review of the fiscal risk through contingent liabilities
     arising from the financial distress of state enterprises and private concessions caused by the economic crisis.

5.   Standardization of Legal Documentation of Corporate Restructuring Transactions. The purpose is to develop a
     manual to more rapidly and consistently document agreements reached between creditors and debtors on restructuring of
     debt. The manual was to provide a standard template which would be used on a voluntary basis.

6.   Principles & Guidelines for Valuation of Debt Restructuring for the Bank of Thailand, to be used by state-owned
     banks and asset management companies in restructuring their non-performing loans. The guidelines were to provide the
     employees of state-owned institutions with a systematic approach to calculate the least cost solution to debt restructuring
     and loan write-off; and therefore, a certain amount of legal protection against potential legal liability of causing damages
     to the institutions. The consultant was also to develop industry data base to be used as financial benchmarks in
     restructuring.

B. Project Financial Data

 Grant Approval Date:              Grant Amount: (in US$)             Grant Agreement Date:               Closing Date:
 September 1998, Round 2           $747,000                           September 18, 1998                  February 29, 2000

                                             FY          Amount              FY         Amount             FY          Amount

 Disbursements (estimated in US$)          98       $50,000             99        $200,000               00       $497,000
 Disbursements (actuals in US$)            98       $0                  99        $275,471.4             00       $393,146.6
C: Performance Ratings

Date of Previous Report:             January 2000
Date of Last Mission:                Project is co-managed from the World Bank Office Bangkok with ongoing monitoring.

Assessment of project performance 1
(Use the rating for questions 1-2 a ,b, c below)
1. Overall Status Rating                                                        This form             Last Form
       Based on field mission:                                                  ____1___              ___1____
       Based on other sources:                                                  ________              ________

2. Timeliness of Project Implementation
      a. Procurement of Consultants                                             ____1____             ____1___
      b. Project Costs                                                          ____1____             ____1___
      c. Delivery of Government Contributions                                   ____N/A__             ____N/A_
      d. Percentage Completed                                                   _____100%_____
      e. Actual Completion Date:                                                August 1, 2000

Discussion of Project Results

The trust fund closed February 29, 2000, . On August 20, 2000 the last sub-projects under this grant agreement was
completed, as the Principles and Guidelines for State Owned Bank Restructuring was approved by the Governor of the
Central Bank and the Financial Institutions Development Fund.

As most components were oriented toward building capacity among debtors, creditors and the government, they served a
critical purpose during the early days of the crisis. For one year, this grant provided the only donor funded technical
assistance addressing this extremely complex problem. The technical assistance, which introduced best practices through
very targeted interventions, provided a good foundation for later efforts funded directly by the private sector and by other
bilateral donors.

Economic disincentives, however, limited the full impact of the technical assistance on reducing non-performing loans. As
the Royal Thai Government followed a market-oriented approach to the financial crisis, commercial banks were incentivized
to seek commercial sources of recapitalization. State creditors, on the other hand, faced uncertain governance and possible
legal liability for corporate restructuring. Thus, both private and state- commercial creditors were very reluctant to take
prompt, appropriate levels of losses on restructuring of debt. Thai corporate debtors, on the other hand, faced a somewhat
blunt incentive environment due to a weak insolvency regime as well as slow recovery of the demand environment. With the
exception of foreign manufacturers operating in Thailand and serving established export markets, the Thai corporate sector
has faced a weak demand environment. Thus, three years after the floatation of the Baht, a substantial overhang of non-
performing loans still exists, and much of the restructuring that took place involved rescheduling of maturity in a manner
which avoided substantial losses. Formal, operational restructuring of distressed firms has also not become a widespread
practice. The government is focused on the use of IT to stimulate business improvement. The problem of corporate distress
remains a risk to the financial system, albeit a substantially smaller and more manageable one.

The technical assistance has been well received among private creditors, who have reduced non-performing loans
substantially. Progress in clearing non-performing loans of state-owned banks has been less successful. Therefore, the final
activity proposed under this grant was the development of Principles and Guidelines for State Owned Bank Restructuring. In
early August 2000, the Governor of the Bank of Thailand and the Financial Institutions Development Fund approved the
document for implementation. The translated Thai version is in process of being completed. The guidelines have been put
through an external legal review to ensure legal compliance. The data base is being compiled using industry data sources
from the Industrial Financial Corporation of Thailand (IFCT). During the project period, the client has provided extensive
directions and technical substances to better improve the previous drafts of the guidelines. Version 7.0 is a comprehensive
debt restructuring manual, and the client believes that state-owned institutions will greatly benefit from using the guidelines.
Once approved the implementation process will commence with four seminar/training sessions planned for policy makers,
regulators, and state-owned institutions

1
 1 for No significant problems, 2 for Moderate problems, 3 for Major problems, with appropriate actions being taken to
address these problems, 4 for Major problems that are not being addressed adequately. See OD 13.05, Project Supervision,
Annex D-2 for details.
.
D: Verification of Compliance

Sub-Project                                         Firm                       Office of           Compliance
                                                                               Registration/       Status
                                                                               Key
                                                                               personnel
Corporate Debt Restructuring Monitoring             PriceWaterhouse            Thailand/           Asem Asian
System for Bank of Thailand                         Coopers (Thailand)         UK
Training For Workout Departments Of Thai            Ferrier Hodgson            Thailand/           Asem Asian
Banks and Finance Companies                         (Thailand)                 Australia
Increasing Awareness Of Corporate                   Recovery Group             Thailand/           Asem Asian
Restructuring In The Thai Business Sector.          (Thailand)                 USA
Assessment of financial situation of state          Sgv Arthur Andersen        Thailand            Asem Asian
enterprises
Standardization of Legal Documentation of           George & Kowit             Thailand            Asem Asian
Corporate Restructuring Transactions.               (Thailand) .
Principles & Guidelines for Valuation of Debt       Deloitte & Touche          Thailand/           Asem Asian
Restructuring for the Bank of Thailand              (Thailand)                 UK

Procurements were executed primarily through the Thailand-based consulting firms. While all firms acquired Thai
registration, many used personnel from overseas offices. Where this was the case it is noted above.

Dissemination of Results
Sub-Project                                           Training                Participants              Manuals/
                                                      sessions                                           Reports
                                                                                                      disseminated
Corporate Debt Restructuring Monitoring                    5                Bank of Thailand                80
System for Bank of Thailand
  Monitoring system and Training
  Tax Manual Component                                     1                  Banks, BOT                   200
Training For Workout Departments Of Thai                   3            Thai Bankers’ Association          100
Banks and Finance Companies                                              Association of Finance
                                                                               Companies
                                                                           Ministry of Justice
  Banker training sessions
  Pilot mediation component                                4                 Bank of Thailand               10
Increasing Awareness Of Corporate                          7                Federation of Thai             2000
Restructuring In The Thai Business Sector.                                  Industries (6 cities)
Assessment of financial situation of state                              Office of State Enterprises   1
enterprises
Standardization of Legal Documentation of                                   Bank of Thailand                5
Corporate Restructuring Transactions.
Principles & Guidelines for Valuation of Debt              4             All state-owned Banks,             20
Restructuring for the Bank of Thailand                                    Financial Institutions
                                                                           Development Fund

Report
 Prepared by:                            Date:                     Reviewed by:                           Date:
    Magdi M. Amin                                                  Loup Brefort                           10/16/2003
                                         8/3/2000

				
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