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Introduction

Since the severely economic crisis hit Thailand in 1997, Thai government has applied

and implemented many measures to improve the economy. To-date, the economic recovery has

been confirmed in various sectors.

One of the important measures is the financial sector reform to strengthen the financial

system in general and to reduce the non-performing loans (NPLs) in particular. Some of the

measures are as follows:-

– upgrading supervision and regulatory standard in March 1998 to strengthen the

soundness of financial institutions,

– announcing a comprehensive financial restructuring package on August 14, 1998 to

provide resolute and forceful actions to address the outstanding weaknesses in the financial

sector as well as provide the framework for the provision of public funds to recapitalize the

viable financial institutions,

– encouraging financial institutions to set up, capitalize, and fund private Asset Man-

agement Companies (AMCs) to provide maximum flexibility to deal with their bad assets,

– determining the framework for financial sector consolidation,

– facilitating corporate debt restructuring.

Main Objective of Corporate Debt Restructuring

The primary purpose of corporate debt restructuring is to reduce NPLs. At the time,

in effect, lenders will receive loan repayment more than they can get from settlement through

the court and borrowers can continue their viable business operation. To achieve this objective,

the Bank of Thailand Notification BOT X. (C ) 2112/2542 has emphasized that debt restructur-

ing should be carried out to help debtors who have difficulties in loan repayment due to the

effects economic crisis but are expected to recover in the future. In addition, financial institu-

tions should ensure that restructuring is not carried out with the objective of postponing or

Out-of-Court Corporate Debt Restructuring in Thailand *

Tumnong Dasri**

* Paper prepared for the presentation to the “International Conference on Systemic Resolution of Cor-

porate and Bank Distress in Crisis-Affected East Asian Countries” held in Tokyo, Japan, January 11-12,

2000 and co-sponsored by World Bank, Asian Development Bank Institute, and Institute of Fiscal and

Monetary Policy, Ministry of Finance-Japan. The views expressed here are those of the author and do

not necessarily reflect the official views of the Bank of Thailand.

** Mr. Tumnong Dasri is the Director of the Corporate Debt Restructuring Office 7, The Corporate Debt

Restructuring Group, Bank of Thailand.

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* It has been reorganized as Corporate Debt Restructuring Group (CDRG) since 1st December 1999.

avoiding debt classification or provision requirements, or the avoidance of stopping interest

accruals.

Supporting Authorities

Corporate debt restructuring is quite complicated. Thus, it is necessary to have efficient

authorities, supportive legal and regulatory infrastructure, as well as willingness on the parts of

creditors and debtors.

As the first step, the Bank of Thailand, in cooperation with 5 associations, set up the

Corporate Debt Restructuring Advisory Committee (CDRAC) and established the framework for

corporate debt restructuring—the so-called Bangkok Approach. The CDRAC, then established

other 3 frameworks to facilitate corporate debt restructuring which are the Debtor-Creditor

Agreement on Debt Restructuring Process, Inter-Creditor Agreement on Restructure Plan Votes

and Executive Decision Panel Procedures, and Simplified Debtor-Creditor and Inter-Creditor

Agreement. Each framework has its unique feature, but same objective of reducing NPLs.

a) CDRAC

In order to facilitate the process of debt restructuring, the Joint Public-Private Consul-

tative Committee (JPPCC) had a resolution on June 2, 1998 to establish the Corporate Debt

Restructuring Advisory Committee (CDRAC). It is chaired by the Bank of Thailand’s Governor,

with representatives from the Thai Bankers’ Association, Foreign Bank’s Association, Associa-

tion of Finance Companies, Board of Trade, and Federation of Thai Industries.

CDRAC’s mandate is to help push ahead the complicated debt restructuring through

establishing a framework for negotiation and eliminating legal and tax obstacles to the restruc-

turing process. It also closely monitors the progress in restructuring at large.

b) Sub-Committee

Accordingly, CDRAC has set up the Sub-Committee with the main responsibility is to

succeed CDRAC policy. It assists the main committee in solving the problem up front, and also

monitors the progress in more detail.

c) Provincial Debt Restructuring Sub-Committee

To expand corporate debt restructuring throughout the country, JPPCC established

Provincial Debt Restructuring Sub-committees chaired by provincial governors.

d) The Office of CDRAC*

This Office is a part of the Bank of Thailand. It is an operational unit of CDRAC. To

facilitate debt workouts, apart from helping solve the restructuring problem, officials and case

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managers will coordinate and assist in contacting between debtors and creditors, and analyze,

facilitate and mediate as well as monitor each debt restructuring case.

Tools for Expedition the Debt Restructuring Process

A. Bank of Thailand’s Notification on Debt Restructuring

At first, the Bank of Thailand issued the regulations for debt restructuring for financial

institutions as per BOT Notification X. ( C ) 1837/2841 dated June 2,1998. The regulations had

been drawn up with the purpose of introducing a formal strategy which financial institutions can

refer to when restructuring troubled debts. The important principle is that the highest level of

management should participate directly in formulating the debt restructuring strategy as follows:

● policy and procedures are clearly defined and written

● the strategy should cover every stage of the restructuring process from start to

finish including clear time-bound objectives, the approach and methodology for

evaluating and granting loans, measures for monitoring and reporting on perfor-

mance against those objectives to ensure that the restructuring has been carried

out correctly in terms of its objectives and its accounting principles

● when the debt-restructuring contract is signed, financial institutions must closely

monitor debt payment schedule and always evaluate debt service capability.

Presently, this Notification had already been replaced by BOT Notification X. ( C ) 2112/

2542 dated June 1, 1999 with a slight amendment. However, the main principles are more or

less the same. Regarding the debt restructuring procedures and documentation, financial

institutions must draw up action plans and prepare the relevant document in each stage of the

debt restructuring as follows:

a) Preliminary Analysis and Documentation

The following information and documents must be included to evaluate the restructuring

of a loan agreement.

● Details of the cause of debtor’s credit difficulties and delayed payments of the

principal and/or interest.

● The extent of the problem or cause of the debtor’s credit difficulties, the borrower’s

financial risk, taking account of the borrower’s financial statements, cash flow

statements, and financial forecasts, as well as an assessment of market condi-

tions and other factors relevant to the debtor’s business and financial prospects.

● The expectations or likelihood of full repayment (principal and interest) under the

original loan and under the restructured loan contracts.

● An evaluation of the borrower’s management focusing on their efficiency to

ascertain if there is a need for an external expert’s help in organizational restruc-

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turing—for example, the changing of shareholders, directors, managing direc-

tors, or the managerial approach.

● The completeness and adequacy of the documents and loan criteria used in the

restructuring process.

● If applicable, the collateral valuation should be in accordance with the Bank of

Thailand’s regulations.

● The methodological approach and assumptions used to project future cash flows

and calculate present values.

Note that with regards to the preliminary cash flow projections, financial

institutions may not include uncertain cash flows in the present value estima-

tions of future cash flows, for example, any cash flows resulting from increases

in the principal or the interest rate, or from exercising convertible debentures

based on improvement in the debtor’s circumstances.

● The analyses, the conclusions, and the recommendations for the modification of

terms such as reducing the interest rate, reducing the principal, reducing the

accrued interest, and extending the payment period.

Note that the terms and conditions in the modification of terms must take

account of the economic life of the debtor’s business project(s). Modification of

terms must be within the debtor’s repayment capacity such that the debtor is

able to service the loan to its maturity.

● A revised amortization schedule reflecting the modified terms which is within the

debtor’s ability to repay.

● Details and any remarks regarding the terms and conditions of the loan includ-

ing any financial covenants in the loan contract, for example, with regard to

capital write-downs, recapitalizations, or where financial institutions specify the

right to increase interest rates in the future in line with the debtor’s capacity to

repay the loan (should circumstances improve).

● Legally enforceable contract and relevant documents must be prepared and

signed.

● In cases where financial institutions grant additional loans to debtors with im-

paired loans, institutions must clearly state the purpose and use for which the

additional loan(s) is intended. There must be no implication that the additional

loan is intended for servicing an existing loan.

b) Follow-up Procedures and Documentation

Financial institutions must have follow-up procedures to monitor restructured loans,

which are in accordance with the regulations set out. This is to ascertain whether debtors are

able to repay their debts as agreed in their revised contracts.

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● Progress reports must be prepared monthly by the designated officer detailing

the latest developments the firm, current action plans, and the likelihood of full

payment.

● Financial institutions must require debtors to provide them with financial state-

ments, and to report the effects of the measures to undertake as part of the

restructuring process such as capital write-downs, recapitalizations, and the

withholding of dividends.

● Financial institutions must set out guidelines for actions to be taken if debtors

have further difficulties with repayment after restructuring.

B. Bangkok Framework

Fundamentally, CDRAC is guiding out-of-court debt restructuring negotiation. It estab-

lished the framework for Corporate Debt Restructuring—the so-called Bangkok Approach

modeled along the London Approach. The chairman of five associations (creditors’ and debtors’

associations) had made the signatories to the framework on August 25,1998.

Bangkok Framework is a guideline for debt restructuring between creditors and debtors,

especially in the case of the large corporate debtors with multi-creditors, (was premised on the

basis of the general accepted practice and voluntary workouts with an aim to maximize benefits

of creditors, debtors, shareholders, and employees.)

The Framework is a market-based approach and has no legal binding for concerned

parties. It is a guideline for coordination between debtors and creditor, and focuses on the

corporate restructuring with the aim for business viability rather than pure debt restructuring.

This guideline contains 19 principles for the parties concerned to observe as follows:

1. Any corporate debt restructuring should achieve a business rather than just a finan-

cial restructuring to further the long-term viability of the debtor.

2. Priority must be given to rehabilitate assets to performing status on full compliance

with Bank of Thailand regulations.

3. Each stage of the corporate debt restructuring process must occur in a timely

manner.

4. From the first debtor-creditor meeting, if the debtors management is providing full and

accurate information on the agreed schedule and participation in all creditor committee meetings,

creditors shall “Stand Still” for a defined, extendable period to allow informed decision to be made.

5. Both creditors and debtors must recognize the absolute necessity of active senior

management involvement throughout.

6. A lead institution, and a designated individual within the lead institution, must be

appointed early in the restructuring process to actively manage and coordinate the entire pro-

cess according to defined objectives and deadlines.

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7. In major multi-creditor cases, a steering committee representative of a broad range

of creditor interests should be appointed.

8. Decisions should be made on complete and accurate information, which has been

independently verified to ensure transparency.

9. In cases where accountants, attorneys and professional advisors are to be appointed,

such entitles must have requisite local knowledge, expertise and available dedicated resources.

10. While it is normal practice to request the debtor to assume all the costs of profes-

sional advisors, lead institutions and creditors committees, creditors have a direct economic

interest, and hence a professional obligation, to help control such costs.

11. The Ministry of Finance and the Bank of Thailand should be kept informed on the

progress of all debt restructuring to aid the review and regulatory and supervisory framework

and to facilitate corporate debt restructuring.

12. The roles of the corporate debt restructuring advisory committee are as follows:-

– follow-up developments in debt restructuring.

– review and implement policies to facilitate debt restructuring for the public good.

– may also act as an independent intermediary in the restructuring process where

cases are particularly difficult or where other efforts have failed. The committee may well be

a catalyst to activate sluggish negotiations.

13. Creditors existing collateral rights must continue.

14. New credit extended during the restructuring process above existing exposures as

of the standstill date on reasonable terms in order that the debtor may continue operations must

receive priority status based on title orientated security, inter-creditor agreements or indemnities.

15. Lenders should seek to lower their risk and hence their requisite returns, through

an improved security package and profitability-based benefits rather than increased interest

rates and imposition of restructuring fees.

16. Debt trading is appropriate under certain conditions but the selling creditor has the

professional obligation to ensure the buyer does not have a detrimental effect on the restruc-

turing process.

17. Restructuring losses should be apportioned in an equitable manner which recog-

nizes legal priorities between the parties involved.

18. Creditors retain the right to exercise independent commercial judgement and objec-

tives but should carefully consider the impact of any action on the Thai economy, other creditors

and potentially viable debtors.

19. Any of the principles or implementing policies contained in this framework can be

waived, amended or superceded in any particular restructuring with the consent of all partici-

pating creditors.

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* Sufficient Plan Approval means approval, by a vote at a creditors meeting, of a Proposed Plan by such

percentage of aggregate credit outstanding sufficient to meet the definition of a “Special Resolution” under

section 6 of the Bankruptcy Act B.E. 2483 as amended (or any amended of succeeding definition of “Special

Resolution” under the Bankruptcy Act.)

C. Debtor-Creditor & Inter-Creditor Agreements

Such a non-statutory approach of Bangkok Framework was further complemented by

the establishment of the Debtor-Creditor Agreement on Debt Restructuring Process (Debtor-

Creditor Agreement : DCA) and Inter-Creditor Agreement on Restructuring Plan Votes and

Executive Decision Panel Procedures (Inter-creditor Agreement : ICA). These two agreements

were cooperative drafted by 3 creditors’ associations, namely the Thai Bankers’ Association,

Association of Finance Companies and the Foreign Bank’s Association and approved by the

CDRAC. On March 19, 1999, 63 financial institutions had made signatories to the agreement

in this first Signing Ceremony. Subsequently, other financial institutions decided to sign the

agreements, bringing to the total number of 84 institutions. Debtors, on the other hand, have

to submit the Debtor Accession to creditors or CDRAC to participate in these agreements.

The Debtor-Creditor Agreement and the Inter-Creditor Agreement are on a voluntary

basis, but with legal binding. The agreement has set out the limit timeframe for debtors and

creditors to complete debt restructuring. In addition, Inter-Creditor Agreement has enforcement

mechanism for non-complying creditors. Other features include the roles of mediator and

Executive Decision Panel. The former will resolve the dispute between debtor and one or more

creditors during the workout process while the latter will make a final decision on proposed plan,

if any. (The Executive Decision Panel will take action if the proposed plan which is not received

Sufficient Plan Approval* but get approval from creditors holding not less than 50% of the total

credit outstanding owed to voting creditors or not less than 50% of the number of voting

creditors.)

Nonetheless, the process will come to a conclusion between 5-7 months (extendable by

up to 2 months, see Appendix I ). In sum, all these mechanism will expedite the restructuring

process and to achieve the following core objectives.

● A binding commitment from each debtor to provide information, prepare a busi-

ness plan and otherwise negotiate on a fixed, pre-determined schedule.

● Quick and final resolution on non-performing loans based on a rapid determina-

tion of the financial viability of each debtor.

● Binding agreements amongst creditors on how to handle non-viable or non-

cooperative debtors.

● One-time resolution for all debtors of preliminary matters such as confidentiality

of information, indemnities and debtor standstill arrangements (no creditor stand-

still is imposed by the two agreements).

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● Non-binding mediation between debtors and creditors on possible plan struc-

tures and/or specific issues.

● Standardization of the basic business and financial information required for a

proposed workout and the workout schedule without any constraints or obliga-

tions on the substantive terms of a restructuring.

● Inter-creditor agreement to support (including during court proceedings or other-

wise) a plan that achieves approval by a majority of creditors holding the per-

centage of all outstanding credit needed to pass a special resolution of creditors

under the Bankruptcy Act.

Summary of the Debtor-Creditor Agreement and the Inter-CreditorAgreement

A. The Debtor-Creditor Agreement

● Allows any creditor, the debtor, or CDRAC to convene the first meeting of credi-

tors to attempt a restructuring under the two agreements.

● Requires the debtor to sign the Debtor-Creditor Agreement prior to the first

meeting of creditors or face liquidation or collection lawsuits.

● Requires the appointment of a lead institution and a designated individual to

manage the workout process according to a fixed schedule of approximately 5-

7 months, extendable by up to 2 months.

● Provides standard confidentiality, debtor standstill and indemnification undertakings.

● Requires the debtor to submit preliminary information within 7 days, and all other

information and a draft business plan within 2 months, of the first meeting of

creditors.

● Provides for mediation between debtors and creditors in the event of an impasse

in negotiations.

● Allows creditors holding 26% of the outstanding credits under the agreement to

declare breach by the debtor and terminate the agreement.

● Requires all creditors to seek the debtor’s liquidation or reorganization under

new management in the event of three unremedied breaches by the debtor.

● Imposes penalties of up to 10% of a creditor’s claim only for failure of a creditor

to vote either for or against a proposed plan or to support an approved plan.

B. The Inter-Creditor Agreement

The Inter-Creditor Agreement addresses the second part of the restructuring process

and covers votes by creditors if and when a proposed restructuring plan is developed under the

Debtor-Creditor Agreement.

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● Requires creditors voting against a proposed restructuring plan to provide spe-

cific objections.

● Requires creditors signing the agreement to support in any future proceedings

a proposed plan approved by such number of creditors holding such percentage

of all outstanding credit to a debtor that would bind all creditors to a court-

approved plan under the Bankruptcy Act..

● Refers a proposed plan for a binding decision to be made by the independent

executives (one appointed by each of the three creditor associations) if the plan

obtains approval from at least 50% of all creditors but does not meet the plan

approval requirements.

● Requires that the executives’ decision be a simple, unanimous approval or dis-

approval of a proposed plan.

● Requires creditors to commence legal action against the debtor if a proposed

plan (after one possible modification) cannot achieve approval by the creditors

or executives.

● Imposes penalties of up to 50% of creditor’s claim in the workout for a material

breach of the Inter-Creditor Agreement by a creditor.

● Allows any creditor to opt-out of the Inter-Creditor Agreement (including the

provisions concerning fines) whenever the relevant debtor’s total credits to all

creditors of any kind exceed Baht one thousand million (Baht 1,000,000,000) in

principal obligations.

C. Simplified Debtor-Creditor Agreement

To broaden debt restructuring process nation-wide with the most efficient approach for

small and medium debtors, CDRAC approved the Simplified Debtor-Creditor Agreement (Sim-

plified Version) as proposed by the Thai Bankers’ Association and the Association of Finance

Companies.

This agreement is applied for the restructuring case of small and medium size debtors

with one creditor. Alternatively, it is fine for multi-creditors, but doing separate debt restructuring

workout. Please see the process schedule of SA in Appendix II.

Benefits from Entering the Corporate Debt Restructuring Process

A. Debtor

According to Inter-Creditor Agreement and Debtor-Creditor Agreement, they provide

various benefits for debtors as summarized below:

● Debtors can accelerate the debt restructuring negotiation with financial institu-

tion. At time, they can continue their viable businesses.

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● Under CDRAC procedures, debtors can negotiate with creditors more efficiently

through lead institution or steering committee.

● From the date the debtor executes a Debtor Accession, creditors will temporarily

suspend payment of default interest on any of their credits outstanding. Upon

the debtor achieving Sufficient Plan Approval, creditors agree to waive any default

interest accrued up to the date debtor receives Sufficient Plan Approval.

● If there are any disputes arising between the debtor and one or more creditors

at any time during a workout, the approved mediator will assist in the settlement

of that issue.

● Any information prepared for a process of corporate debt restructuring will be

kept and protected in strict confidence.

● During the process of restructuring, Debtor’s management still retain their roles

and responsible for their normal duties.

● In case that debt to equity conversion is required for the survival of business, share-

holders with absent fraud or willful default should retain some equity of the company.

B. Creditor

The Agreements also provide benefits for creditor as summarized below:

● Creditors will be treated equally and fairly in term of getting repayment. In

addition, the value of loan repayment is higher than liquidation value.

● Regardless of any types of creditors, they will be treated equally and fairly.

● Lead institution will facilitate the negotiation as well as expedite the debt restruc-

turing process.

● For the best restructuring plan, creditors will receive the necessary and accurate

information including the latest credit outstanding.

● Under the same standard workout procedure, all creditors can monitor and

follow up the workout step by step.

● Creditors are confident that any term agreed before some creditors sell their

outstanding credits to third party will not be changed or renegotiated.

● Creditors are confident that if a Proposed Plan is approved by creditors holding

not less than 50% of the total credit outstanding owed to voting creditors or not

less than 50% of the number of voting creditors, but does not receive Sufficient

Plan Approval, an Executive Decision Panel will help in making a final decision.

Incentives

To persuade parties to enter into the corporate debt restructuring process voluntarily,

many governmental agencies have done legal amendment beneficial for them. Some measures

in effect are as follows:

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1. Tax concessions for the financial institutions’ debt in case of debt restructuring.

● Income arising from debt forgiveness between 1st January 1998 to 31st Decem-

ber 2001.

● Income arising from actions in the debt restructuring process between 1st Janu-

ary 1998 to 31st December 2001.

2. Financial institutions may use the amount of debt forgiven in debt restructuring as

a tax-deductible expense in calculations of taxable income.

3. Financial institutions may stop using the accrual income recognition principle in the

calculation of taxable income with regards to debtors who have failed to make repayments for

over 3 cumulative months instead of 6 months.

4. The establishment of reasonable grounds for which the Revenue Department deems

it appropriates to collect certain types of tax.

5. Creditors may deduct the Input Tax paid on the construction of a building from the

Sales Tax on sale of the building.

6. Registration fee concessions reduced to 0.01 percent until 31st December 2001 on

the transfer of land and property ownership in support of debt restructuring in the following

cases.

● Financial institutions for the transfer of property to a debtor, or the receipt of a

return transfer of property from a debtor.

● Financial institution debtors for the transfer of property to a third party for repay-

ment of debt owed to a financial institution.

● Financial institutions for the registration of additional mortgage of property from

the debtor.

● Creditors other than financial institutions and creditors with common debtors to

financial institutions, for the transfer of property to or from a debtor.

● Creditors for the transfer of property to or from a debtor under the Bankruptcy

Act.

● Tax exemptions regarding the transfer of assets to a third party in order to make

debt repayment to the creditor (s).

● Tax and registration fee concession for the ownership transfer of land from a

new investor to a creditor.

7. The exemption of stamp duty for the import of machinery for debtors under the BOI

assistance scheme in cases where the machinery is transferred to the creditor as part of a

leasing or hire-purchase contract. Allowance of financial institution and third parties to receive

the transfer of permits to undertake business operations of industrial works, other permits and

concession granted in order that the financial institution may continue its operations to restruc-

ture. The transfer of BOI privileges to a new investor in the debtor company.

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8. Tax concessions for debt restructuring following court reorganization of the debtor

under the Bankruptcy Act.

● Income arising from debt forgiveness

● Income arising from court reorganization of the business

9. The amount of debt forgiveness granted by creditors under court reorganization

shall be deductible in the calculation of taxable income.

10. Tax concession for debts restructuring for debtors whose creditors are not financial

institutions.

● Income from debt forgiveness between 1st January 1998 to 31st December 2001.

● Income arising from actions in the debt restructuring process between 1st Janu-

ary 1998 to 31st December 2001.

11. Non-financial institution creditors may use the amount of debt forgiven in debt

restructuring as a tax-deductible expense in calculations of taxable income.

12. The allowances of financial institutions to undertake hire purchase or hire purchase

leasing business in the process of debt restructuring.

13. The acceptance of BOT regulation allowing the phase-in of loan loss provision

from loan classification and present value calculations over 5 accounting periods.

14. The reduction of registration fees for the ownership transfer of condominiums to

0.01 percent.

15. Allowance of financial institutions to hold foreclosure assets transferred to it during

1st January 1997 - 31st December 2001 up to 10 years.

16. Exemptions or concession regarding the transfer of rental rights over crown prop-

erty.

17. Financial institutions are allowed to purchase or hold share of any limited company

in an amount exceeding limits prescribed by laws.

18. Financial institutions are allowed to grant concession on guaranteed limits to the

debtor who is the bidder in government’s construction project.

19. Financial institutions are allowed to write off the debtors classified as doubtful and

loss with 100% provision from the account. The amount can also be treated as expenditure for

tax deduction.

20. Financial institutions are allowed to immediately change asset classification to “Pass”

without having to wait for 3 months or 3 accounting periods for debtors undergone successful

debt restructuring under BOT requirements who meet one of the following criterion:

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Credit OutstandingNo. of Cases

(billion baht)

1. Completed cases as at 31/12/99 110 249.7

2. Agreement on Plan, in process of documentation

and signing as of 31/12/99 68 245.8

3. Cases in process of debt restructuring as at 31/12/99 370 524.4

4. Cases in process of signing Debtor Accession 870 557.1

5. Cases in process of legal action as at 31/12/99 216 404.5

6. Normal Loans as at 31/12/99 60 159.7

Total CDRAC target cases as at 31/12/99 1,694 2,141.2

1. Debtor can pay the interest no less than the market rate without requiring the

grace period on interest payment.

2. Debtor with debt restructuring loss of no less than 20% of debt outstanding.

3. Debtor with loan syndication or with more than one creditor.

4. The court approved the debtor’s request for debt restructuring or rehabilitation

plan.

The Progress of Debt Restructuring

The CDRAC initially accepted 200 target cases of debt workouts proposed by the

member associations. These target cases involved 351 companies with debt and overdue

obligations totaling 674.3 billion baht. The cases have been proposed and accepted as they

involve complicated multi-creditor-type of debt restructuring that requires outside mediator role.

Subsequently, 370 additional target debtors were selected to join the Committee’s monitoring

program with credit outstanding of 831 billion baht. Thus, the total CDRAC target cases as at

15 December 1999 involved 721 companies with debt and overdue obligation totaling 1,505.3

billion baht.

In addition, in November 1999, CDRAC has approved 973 additional target debtors to

join the Committee’s monitoring program with outstanding about 600 billion baht. This new list

has been monitoring since 15 December 1999. In sum, there are presently 1,694 companies

as at 31st December 1999 under the CDRAC restructuring process with the credit outstanding

totaling approximately 2.1 trillion baht. The progress of debt restructuring of total target cases

under DCA and ICA can be summarized as follows:

It is worth noting that, CDRAC not only monitors the debt restructuring for the compli-

cated multi-creditor companies under the DCA and ICA but also monitors the small and medium

cases under Simplified Agreement. The progress of target debtors under Simplified Agreement

approved by CDRAC during June-December 1999 are as follows:

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Credit OutstandingNo. of Cases

(billion baht)

1. Target debtors 3,876 184.1

2. Stage of development

2.1 Debtors in process of signing SA 1,240 8.8

2.2 Creditors to take legal action against non-signatory 688 73.9

2.3 Debtors in restructuring process 1,948 101.4

– Completed cases 910 16.3

– Restructuring in process 842 81.0

– Creditor to take legal action 196 4.1

For the overall picture of debt restructuring reported by financial institutions (i.e.,

commercial banks, finance companies, credit foncier companies and international banking fa-

cilities) as at the end of December 1999, the completed debt restructuring has increased by

23,604 cases to 173,709 cases with a corresponding increase in credit outstanding of about

17.82% or 162.1 billion baht to 1,072 billion baht. Financial institutions with a key role in debt

restructuring are the Thai commercial banks which have completed debt restructuring of 945.5

billion baht as at end-December signifying an increase of 152.6 billion baht since November.

The increase in completed debt restructuring is composed of 94.1 billion baht by private com-

mercial banks, and 58.5 billion baht by public commercial banks.

Throughout the 12 months of 1999, completed restructuring case have increased by

164,694 cases with corresponding increase in credit outstanding of 915.2 billion baht or about

76.0 billion baht monthly. Cases in process of restructuring have increased by 7,405 cases to

26,199 cases with credit outstanding increases 430.0 billion baht to 1,120.5 billion baht.

In sum, completed debt restructuring cases and cases in process of debt restructuring

as at end-December 1999 totaled 199,908 cases with credit outstanding of 2,192.6 billion baht.

Business sectors reporting the largest amounts of completed debt restructuring cases by credits

outstanding include the manufacturing, the real estate sectors, services, and wholesale and

retail where about 77% are from Bangkok, and the remaining 23% are provincial cases (see

Table 1-4, Appendix III)

Assessment of Completed Debt Restructuring of Target Debtors

The CDRAC has been monitoring debt restructuring process of target debtors with a

large number of successful cases. To evaluate the restructuring already undertaken, the Bank

of Thailand has commissioned the International Project Finance Limited (IPF) to conduct a

study project, to analyze and assess whether such restructuring was real and effective, which

would improve the chances of financial institutions to recover their debt more than taking other

actions.

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The IPF took 10 sample completed restructuring cases from various business sectors,

such as manufacturing production, communications, hotel, wholesale and retail trade, and con-

struction, with debt totaling around 63 billion baht. These cases include restructuring under the

Debtor-Creditor Agreement and those completed prior to the establishment of the DCA. The

study project took 2 months.

The consulting firm interviewed both creditors and debtors, analyzed the information

available, including present and future prospects of debtors’ business and financial projections

prepared jointly by debtors and creditors in submitting the restructuring plans. Moreover, to

evaluate the feasibility of the plans, the consulting firm applied various measures, particularly

the projected debt service coverage (DSC).

Essentially, effective restructuring plan means the debtor should be able to operate with

sufficient earnings and cash flow to be able to meet future debt service requirements. In this

regard, the value of DSC must be greater than 1 in order to allow flexibility in the restructuring

and to withstand uncertainties from future operations. If the value of DSC is equal to or less

than 1, the restructuring plan may not be flexible enough to withstand changes, thus resulting

in a re-entry of the restructuring process.

In the 10 sampled cases, there were debt reduction and real losses as measured by

the net present value (NPV) in the range of 20-30 %. At the same time, debtors will also suffer

in the form of share dilution due to debt-to-equity swaps or new investors.

The IPF concluded that given the legal framework, the restructuring undertaken was

real and effective , which would vastly improve the chances of creditors to recover their debt.

Because there would be newly agreed conditions and real losses suffered, financial institutions

will be able to collect more than taking other actions, such as liquidation. In the meantime, if

the relevant legislation can be amended to enable a swifter legal procedure, more responsibility

would fall on the debtors to seek early resolution, thereby strengthening the overall corporate

debt restructuring efforts.

Conclusion: Problems & Prospects

Even though the progress of debt restructuring has significantly achieved through CDRAC

process, many problems still exist. Most debtors and some creditors lack of experience in debt

restructuring is a major obstacle in managing the workouts. For example, debtors mistakenly

enter the process with expectation of reducing of loan repayments while creditors turn down the

loss-sharing concept in fear of capital fund deterioration, which causes a wide difference in

negotiations. When the negotiation comes to the disputes between creditors and debtors, there

are less qualified mediators to help solve their disputes.

The debtors whose ways of fleeing away from loan repayment—a so-called strategic

NPL—are not cooperative and create a dark-side of restructuring culture which is harmful to

credit system. Some debtors are not cooperative in providing complete and accurate informa-

16

tion in preparing the debt restructuring plan. The financial advisor and/or the steering committee

cannot assess the company’s actual financial position in order to draft a workable restructuring

plan. This also leads to a delay and incompleteness of the proposed plan within a timeframe.

In addition, some companies are not transparent in explaining a number of questionable trans-

actions including their off-balance sheet loan, the collectability of the account receivables, the

SWAP contracts and the total amount of debt.

Some cases involve quite a number of creditors both domestic banks and international

banks. Thus, they need time to agree on term sheet proposed by the debtors due to their

different policies and collaterals. For commercial bank operations in Thailand, there is mostly

centralized making a delay to a settlement of workouts.

Therefore, introductions of an in-good-faith negotiation should take into a consideration

by the parties concerned.

However, even though some obstacles to achieve the workout process still exist, the

experiences gained since late 1998 would help expedite the workouts. In addition, most of the

721 target cases under CDRAC supervision were in the final stage. Most of them have finished

voting the proposed plans and waiting to sign the actual agreements. Therefore, the amount

of completeness has the trend to increase in the first quarter of 2000. The new 973 target cases

are expected to be resolved within the third quarter of 2000. As a result, it will be reflected in

the further downward trend of NPLs which has been evidently gradually reduction since the

second quarter of 1999 (See Appendix IV).

As a consequence, we can conclude that the progress of corporate debt restructuring

from this point onward should speed up as the institutional framework for voluntary debt restruc-

turing of the corporate sector has been strengthened and an appropriate legal framework has

been established. Thereby, the non-performing loans in the Thai financial system, which have

risen swiftly in 1998, are estimated to decline significantly in the very near future.

17

Appendix IThe debt restructuring process schedule under DCA-ICA

1. Call first meeting of Creditors Anytime by CDRAC, Debtor or any Creditorunder the Agreement

2. Debtor executes Debtor Accession; First Within 15 Business Days of #1Creditor Meeting, appointment of SteeringCommittee/Lead Institution; Establishmentof Workout Schedule

3. Creditors submit claims in writing to Steering Within 15 days of #2Committee/Lead Institution

4. At any creditors meeting or Steering ContinuousCommittee meeting a debtor representativewith decision-making authority must appearand answer any and all questions

5. Debtor’s “Management” (i.e. directors or within 7 days of #2authorized officers) must submit at a mini-mum the following information; a) assets,liabilities and obligations the Debtor owes tocreditors; b) property given by the Debtoras security to creditors and the date given;c) property of other parties in the Debtor’spossession; d) the Debtor’s shareholdingsin other companies or juristic persons;e) names, businesses and addresses of allcreditors; f) names, businesses and addressof the Debtor’s debtors; g) details of theproperty including payments which theDebtor expects to receive in the future.

6. The appointment of an independent Within 7 days of #2accountant and/or other experts shall becarried out as requested by the creditorsbased on the agreed terms of reference.

7. Debtor submits information draft business Within 2 months of #2 extendable by CDRACplan and all further information requested up to 1 month maximumby creditors or independent accountant.

8. Proposed Plan submission to all Creditors Within 3 months of #2 extendable up to 2by Creditors Committee. Debtor and months maximum with consent of CDRAC.independent accountant, along with written If no timely Proposed Plan is submitted.approval of the Proposed Plan by the Debtor CDRAC will appoint at Debtor’s expense a

qualified financial advisor to prepare a ProposedPlan within 30 calendar days

9. Creditors propose amendments to Proposed Within 10 Business Days of #8Plan

10. Creditor Meeting to vote on plan, dissenting 15 Business Days after #9creditors may submit an alternativeProposed Plan

11. Second vote on Proposed Plan or vote on 10 Business Days after #10 (if sufficient PlanAlternate Proposed Plan (if necessary) Approval is not achieve under 10).

18

Appendix II

The debt restructuring process schedule under SA

1. The financial institution (creditor) sends the Within 15 days from the date CDRAC notifiesSimplified Debtor-Creditor Agreement to its the financial institution of the name of the

debtor via certified mail. debtor that has already been approved.

2. The debtor signs the Agreement and sends Within 45 days from the date CDRAC notifiesthe necessary documents as specified in the financial institution of the name of thethe Annex A. back to its creditor. debtor that has been approved.

3.1 If the debtor fails to comply with the proce- Within 160 days from the date CDRAC notifies

dure specified in #2 within the timeframe, the financial institution of the name of thethe creditor is to take legal action. debtor that has already been approved.

3.2 If debtor complies with the procedure in #2.,the creditor is to analyze the documents

and negotiate with the debtor to reach asolution.

4. If the debtor and creditor have sufficient Within appropriate timeframe, but not exceedreasons for not being able to reach a 60 days from the date the debtor signs the

solution, both must submit a request to Simplified Debtor-Creditor Agreement.CDRAC to appoint a mediator.

5.1 The creditor submits the solution reached in Within 60 days from the date the debtor signs#3.2 or #4 to be approved by its authorities. the Simplified Agreement, or within 25 days

Once the decision is made, the creditor is to the financial institution is informed by CDRACnotify its debtor of the decision, and the new of the mediator’s decision.conditions made, if necessary, in writing.

5.2 During the process of #3.2, should the Within 60 days from the date the debtor signs

creditor has a reason to believe that the the Simplified Agreement. Legal action is todebtor is not coordinating to reach an be taken within 120 days from the date theagreement, the creditor may decide not to creditor notifies its debtor of the decision not

proceed with the restructuring and notify to proceed with the restructuring.the debtor accordingly.

6.1 If the debtor concurs with the decision in Within the timeframe to be agreed upon.#5.1, the debt restructuring agreement is to

be drafted and signed.

6.2 If the debtor does not agree with the Within 10 days from the date the creditordecision in #5.1 but coordinates with the notifies the debtor of the decision in 5.1.creditor in the restructuring process, a new

solution must be reached to be resubmittedfor approval by the authorities. In case thenew solution cannot be reached, the creditor

and debtor may jointly request CDRAC toappoint a mediator.

19

Appendix II (Continued)

The debt restructuring process schedule under SA

6.3 If the debtor does not agree with the Within 120 days from the date the creditordecision in #5.1 nor coordinate with the notifies the debtor of its decision in #5.1.

creditor in the restructuring, legal action isto be taken against the debtor.

7. The creditor submits the new proposal for Within 25 days from the date the new proposalthe authorities’ approval and notifies its is reached from negotiation or mediation in

debtor of the decision in writing. #6.2.

8.1 If the debtor agrees with the decision, the Within the timeframe to be agreed upon.debt restructuring agreement is to bedrafted and signed.

8.2 If the debtor does not agree with the Within 120 days from the date the creditor

decision in #7, the creditor is to take legal notifies the debtor of the decision in #7.action against the debtor.

Appendix III

Table 1 : Summary of Debt Restructuring Cases Reported by Financial Institutions

Credit OutstandingCreditor Increase % Growth

Nov-99 Dec-99 *

Cases In Process of Restructuring Billion Baht 1,259 1,121 -138 -11.0

Case 28,012 26,199 -1,813 -6.47

Completed Restructuring Cases Billion Baht 910 1,072 162 17.80

Case 150,105 173,709 23,604 15.72

Grand Total Billion Baht 2,169 2,193 24 1.11

Case 178,117 199,908 21,791 12.23

* Preliminary Data

20

Tabl

e 2

: D

ebt

Res

truc

turin

g R

epor

ted

by F

inan

cial

Ins

titut

ions

Cla

ssifi

ed b

y C

redi

tor

In P

roce

ss o

f R

estru

ctur

ing

(A)

C

ompl

eted

Res

truct

urin

g C

ases

(B

)

To

tal

(C)

= (A

)+(

B)

Cre

dit

Out

stan

ding

Num

ber

of c

ases

Cre

dit

Out

stan

ding

Num

ber

of c

ases

Cre

dit

Out

stan

ding

Num

ber

of c

ases

Cre

dito

r(B

illio

n B

aht)

(Cas

es)

(Bill

ion

Bah

t)(C

ases

)(B

illio

n B

aht)

(Cas

es)

Nov

-99

Dec

-99*

Nov

-99

Dec

-99*

Nov

-99

Dec

-99*

Nov

-99

Dec

-99*

Nov

-99

Dec

-99*

Nov

-99

Dec

-99*

Tha

i B

anks

1,11

799

526

,511

24,8

1579

394

514

7,54

617

0,89

01,

910

1,94

017

4,05

719

5,70

5

– S

tate

-ow

ned

Ban

ks63

258

619

,298

18,5

7120

226

134

,162

39,5

5983

584

753

,460

58,1

30

– C

omm

erci

al B

anks

484

409

7,21

36,

244

591

685

113,

384

131,

331

1,07

51,

094

120,

597

137,

575

For

eign

Ban

ks &

New

IB

Fs

8777

519

494

6566

608

631

152

143

1,12

71,

125

Fin

ance

Com

pani

es55

4796

687

852

601,

685

1,86

010

710

72,

651

2,73

8

Cre

dit

Fon

cier

s0

016

121

126

632

81

128

234

0

Tot

al1,

259

1,12

128

,012

26,1

9991

11,

072

150,

105

173,

709

2,16

92,

193

178,

117

199,

908

* P

relim

inar

y da

ta

21

Table 3 : Debt Restructuring Reported by Financial Institutions

Classified by types of businesses

In Process of Restructuring Completed Restructuring Cases

Credit Outstanding Credit Outstanding No. Types of businesses No. of cases No. of cases

(Billion Baht) (Billion Baht)

Nov-99 Dec-99* Nov-99 Dec-99* Nov-99* Dec-99* Nov-99* Dec-99*

1 Agriculture and forestry 13 10 2,734 2,622 21 24 15,323 17,844

2 Mining and Quarrying 2 4 105 101 6 6 379 448

3 Manufacturing 470 405 3,987 3,738 268 318 9,769 11,867

4 Wholesale and retail 123 111 6,124 5,724 122 145 30,833 35,763

5 Exports 37 29 305 292 26 30 483 585

6 Imports 47 42 492 463 23 36 760 912

7 Banking and Financial

Businesses 52 49 293 285 52 57 317 360

8 Construction 45 40 1,458 1,355 28 33 4,325 5,219

9 Real Estate Businesses 234 217 1,964 1,821 147 166 4,612 5,338

10 Public Utilities 43 31 456 394 26 40 2,415 2,748

11 Services 133 126 2,302 2,158 118 132 12,722 14,681

12 Personal consumption 59 55 7,787 7,240 72 83 68,157 77,934

13 Leasing 1 1 5 6 1 1 10 10

Total 1,259 1,121 28,012 26,199 910 1,072 150,105 173,709

* Preliminary Data

Table 4 : Debt Restructuring Reported by Financial Institutions

Classified by region

In Process of Restructuring Completed Restructuring Cases

Bangkok and Credit Outstanding Credit OutstandingNo. of cases No. of cases

Regional Areas (Billion Baht) (Billion Baht)

Nov-99 Dec-99* Nov-99 Dec-99* Nov-99 Dec-99* Nov-99 Dec-99*

Bangkok 1,155 1,028 14,585 13,836 707 834 48,104 55,581

Central 45 42 4,084 3,521 91 107 38,458 44,604

North 16 13 3,247 3,060 41 49 21,960 25,657

Northeast 25 22 3,327 3,216 36 42 24,814 28,474

South 17 15 2,769 2,566 35 41 16,769 19,393

Total 1,259 1,121 28,012 26,199 910 1,072 150,105 173,709

* Preliminary Data

22

Appendix IV

Non-performing Loans (NPL)

Table 1 : Outstanding of NPL of financial institutions

(Billion Baht)

1999

Jul. Aug. Sept. Oct. * Nov.* Dec.*

1. Private Commercial Bank 1/ 1,215.09 1,208.86 1,128.74 1,104.57 1,072.72 886.90

(% of total credit) 40.86 40.67 38.27 37.41 35.85 30.652. State-owned Commercial Bank 1,175.72 1,154.24 1,151.10 1,138.55 1,083.12 1,036.04

(% of total credit) 70.07 68.62 65.58 65.27 64.10 61.58

3. Foreign Bank 91.64 93.95 81.81 78.90 74.20 61.00(% of total credit) 12.97 13.43 11.53 11.48 10.92 9.81

Sub-total (1+2+3) 2,482.45 2,457.04 2,361.65 2,322.02 2,230.04 1,983.94(% of total credit) 46.33 45.89 43.62 43.13 41.58 38.17

4. Finance Companies 169.47 161.90 150.15 105.84 102.31 90.03(% of total credit) 68.18 67.22 62.26 56.10 54.49 49.17

Grand total (1+2+3+4) 2,651.92 2,618.95 2,511.80 2,427.85 2,332.35 2,073.97(% of total credit) 47.30 46.81 44.41 43.57 42.02 38.54

Notes : * Preliminary1/ Radanasin Bank is included since Nov. 99 when it became private bank as

UOB Radanasin Bank Public Company Limited.

Table 2 : Net Change of NPL of Financial Institutions

(Billion Baht)

1999

Jul. Aug. Sept. Oct. * Nov. * Dec.*

1. Private Commercial Bank 1/ -7.60 -6.23 -80.12 -24.17 -31.85 -185.82

(%) -0.62 -0.51 -6.63 -2.14 -2.88 -17.322. State-owned Commercial Bank 2.40 -21.48 -3.14 -12.55 -55.43 -47.08

(%) 0.20 -1.83 -0.27 -1.09 -4.87 -4.35

3. Foreign Bank 4.88 2.31 -12.13 -2.92 -4.69 -13.20(%) 5.63 2.52 -12.92 -3.56 -5.95 -17.79

Sub-total (1+2+3) -0.32 -25.41 -95.39 -39.63 -91.98 -246.10(%) -0.01 -1.02 -3.88 -1.68 -3.96 -11.04

4. Finance Companies 1.40 -7.57 -11.75 -44.32 -3.53 -12.28(%) 0.83 -4.47 -7.26 -29.51 -3.33 -12.00

Grand total (1+2+3+4) 1.08 -32.98 -107.15 -83.95 -95.51 -258.38(%) 0.04 -1.24 -4.09 -3.34 -3.93 -11.08

Notes : * Preliminary1/ Radanasin Bank is included since Nov. 99 when it became private bank as

UOB Radanasin Bank Public Company Limited.