This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.


This Selected Issues report on Thailand discusses the rapid growth years of the country before and after the 1997 balance-of-payments crisis. The report discusses development of the crisis and the steps taken to normalize the situation; credit growth before and after the crisis; public debt dynamics in the aftermath of the crisis; export performance before and after the crisis; and an analysis of the role of fiscal policy that led to the 1997 crisis. The report also highlights weaknesses that were threatening the sustainability of Thailand's economic growth.

II. Resolving the Corporate Debt Problem1

19. Thailand’s current economic problems are mirrored in the underlying weaknesses of its corporate sector. To give an additional perspective on the problems facing the economy, this chapter takes a closer look at recent corporate performance. It outlines the main sources of the current corporate debt problem; explains the steps taken by the authorities to improve corporate governance and promote corporate debt restructuring; describes the progress made to date; and sets out the remaining agenda for reform.

A. Causes of the Corporate Debt Problem

20. The current difficulties faced by Thai corporations have their roots in the over investment that took place in the years leading up to the crisis. As noted in the previous chapter, from 1987 to 1995, growth of real fixed investment averaged almost 16 percent, as compared with a real GDP growth rate averaging almost 10 percent. The acceleration in investment took place in the late 1980s, as investment growth rates rose to 20-30 percent per annum. The result was a rise in the investment ratio to around 40 percent of GDP, high both by historic and international standards. In the first half of the 1990s, investment growth moved in line with real GDP growth, holding the investment share at this high level. However, with the capital-output ratio increasing as a result, it was inevitable that diminishing returns to capital would set in, calling into question the sustainability of this investment-led growth. One clear symptom of this was the decline in capacity utilization, which was already showing signs of weakness before the crisis, and which contributed to the investment slowdown starting in 1996.


Capacity Utilizalion, 1995-99

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A002

21. This picture of over-investment and declining real rates of return can also be seen from the financial statements of listed Thai corporations. In three years from 1994 to 1997, the value of assets of a representative sample of 239 nonfinancial listed SET companies almost doubled (Table 1). Asset growth was particularly large in petrochemicals, but also in such largely nontraded sectors as construction, communication, and property development. However, the growth in asset values was not accompanied by equivalently high earnings growth. This deterioration can be seen from declines in the return on assets—which both fell by roughly one-third from 1994 to 1996—and from the fall in stock prices which started in the second half of 1996.

Table 1.

Asset Growth in Selected Sectors 1/

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Source: Staff calculations based on data from Stock Exchange of Thailand and Merrill Lynch Phatra.

Based on a sample of 239 SET listed companies,

22. The financing of the investment boom of the 1990s lies at the heart of Thailand’s current corporate debt problem. In Thailand, in the ten largest nonfinancial private sector firms, the top three shareholders own on average as much as 45 percent of the outstanding shares (Alba, Claessens, and Djankov (1998)). The desire of families to retain control of their conglomerates led them to use debt to finance their expansion. Capital account liberalization facilitated this expansion, by increasing the supply of funds to corporations, both directly and through banks. As a result, by end-1997 the corporate sector had debt of approximately $153 billion (more than 150 percent of GDP), $123 billion financed through the domestic banking system and finance companies, and $30 billion directly financed from overseas.2 The result of this debt-financed expansion was to increase debt-equity ratios, from around 150 percent in 1994 to more than 200 percent by the first half of 1997. (This is high both when compared to the region, and compared to industrialized countries such as the United States, which in 1996 had a debt-equity ratio of just below 100 percent.)

Table 2.

Debt-to-Equity Ratio in Selected Sectors 1/

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Source; Staff calculations based on data from Stock Exchange of Thailand and Merrill Lynch Phatra.

Based on a representative sample of 239 SET nonfinancial listed companies.

The end-1997 increase reflects the effect of exchange rate depreciation on foreign currency debt.

B. Strategies for Resolving the Corporate Debt Problem

23. Thailand’s approach to restructuring corporate debt has been private sector led, market based, and voluntary. Even so, for this approach to succeed, the government has had to make significant efforts to develop the institutional environment. Thus the government’s role has included: (i) significant legal reforms to strengthen the framework for debtor-creditor negotiations; (ii) the removal of barriers (including tax system anomalies) to corporate debt restructuring; and (iii) development of institutional reforms to foster out-of-court debt workouts. The remainder of this section discusses each of these three areas of reform.

Legal Reform

24. Insolvency reform in Thailand has been designed to facilitate corporate debt restructuring in two main respects:

  • First, insolvency reform has sought to create incentives for debtors and creditors to reach out-of-court agreements. For example, by establishing a predictable set of rules that enables creditors to initiate insolvency proceedings against a debtor, which can potentially lead to a total transfer of equity (in the case of rehabilitation proceedings), or liquidation (under bankruptcy proceedings), insolvency law is designed to bring debtors to the negotiating table. In turn, and of more general benefit, strengthened enforcement powers will reduce the riskiness of future lending, thereby increasing the availability of credit in the economy. This leverage provided by an effective insolvency system is of particular importance in countries such as Thailand, where alternative enforcement proceedings (including foreclosure on collateral) are subject to considerable delays and uncertainty.

  • Second, the rehabilitation chapter of Thailand’s insolvency law is designed to provide a mechanism whereby an out-of-court agreement reached between a debtor and a majority of its creditors can be imposed upon a dissenting minority of creditors. Consistent with other modern insolvency laws, the prospects of plan approval are enhanced in Thailand by the use of creditor classification and “cram down” rules (to enforce agreements on any dissenting minority of creditors).

25. To meet these objectives, the authorities introduced a wide range of legal reforms (Box 1). The bankruptcy law has been amended to improve the prospects for the rehabilitation of companies, both by making it easier for creditors to grant additional loans to distressed debtors, and by creating mechanisms that will bind dissident creditors to court-approved restructuring plans. At the same, amendments to the foreclosure law have been designed to strengthen the rights of creditors, speeding up what has been an inordinately long process, and so increasing the incentive for debtors to enter serious negotiations.

Removal of institutional barriers to corporate debt restructuring

26. A number of steps have also been taken to encourage banks to restructure their holdings of corporate debt First, provisioning requirements have been lowered for nonperforming loans, which become performing after being successfully restructured in line with Bank of Thailand rules. Second, the authorities’ financial sector restructuring plan of August 14, 1998 offered official Tier II capital support in exchange for approved corporate debt restructuring. Finally, rules limiting bank ownership of shares in companies have been relaxed to encourage debt-equity conversions.

27. Throughout the process, the government has sought to avoid the use of public funds to bail out corporations. Even so, the government has accepted that there may be a case for providing indirect support to the corporate sector, by providing assistance to the financial sector. One example of such support is the linking of the provision of subordinated debt under the August 14, 1998 Tier II scheme to progress in corporate debt restructuring. However, the government has consistently ruled out purchasing bad loans from banks.

Encouraging out-of-court workouts

28. The authorities have complemented legal reforms with steps to encourage informal corporate debt workouts. The sheer size of Thailand’s corporate debt problem far exceeds the capacity of the court system to rehabilitate corporations. Just as important, the courts lack the expertise to manage and rehabilitate corporations. Rather, the point of legal reform has been to establish a clear and predictable framework so that debtors and creditors understand the likely outcome under a court-supervised process. They can then use this as a reference point—and a spur to action—when entering out-of-court negotiations. Thus the authorities have developed complementary measures aimed at facilitating informal reorganization or liquidation plans.

Legal Reforms to Promote Corporate Restructuring

Thailand’s original Bankruptcy Law dated from 1940, and suffered from two main defects: (i) it provided only for liquidation, not for corporate rehabilitation; and (ii) it gave no legal protection to new financing of corporations in distress.

Amendments to the Bankruptcy Act in April 1998 and March 1999 have included measures to allow the development of rehabilitation plans under bankruptcy:

  • Protection has been increased for unsecured creditors who extend new credits to distressed debtors. This was intended to encourage financing during out-of-court workouts, such as in a pre-packaged bankruptcy. Under Section 94(2) of the original Bankruptcy Act, unsecured creditors were not entitled to file claims for payment of the debt if the debtor was known to be insolvent at the time the loan was extended. This prevented insolvent debtors from receiving new credit, even when this might have increased the value of the firm, for example, by providing essential working capital. Section 94(2) has since been amended to exclude (i) debts incurred under a court-supervised rehabilitation plan and (ii) to recognize the claims of unsecured creditors who choose to restructure their debt outside formal bankruptcy.

  • Provisions have been included that allow for voting on reorganization plans by classes of creditors.

  • Bankruptcy procedures have been made more predictable by (i) establishing new Bankruptcy Courts with trained judges specializing in bankruptcy procedures; and (ii) introducing objective rules for courts to confirm reorganization plans approved by creditors, and protecting creditors by requiring that no dissenting class of creditor or the debtor would receive less under the approved plan than they would under liquidation.

  • Reforms of a more technical nature include: (i) allowing for the rescission of payments and transfers prior to reorganization or liquidation; (ii) providing clear rules whereby outstanding contracts of the debtor may be rejected; and (iii) clarifying the rules for use of the exchange rate in determining the voting power of creditors with foreign currency denominated claims.

Additional measures have been introduced to strengthen foreclosure procedures, and so encourage new financing of corporations through secured lending. These include streamlining procedures for so-called “petty cases”, and expanding their applicability; and limiting the discretionary power of courts to rescind auction sales of foreclosed assets. However, rules to allow the courts to automatically rule in favor of creditor if the debtor fails to respond to the court, which would speed up the court process, have still to be enacted.

Finally, the authorities have amended the Alien Business Law, in an effort to liberalize foreign investment. This has involved easing restrictions on the foreign ownership of companies, supplemented by reforms to facilitate foreign ownership of land and property in Thailand.

29. Most prominent among these has been the creation of a Corporate Debt Restructuring Advisory Committee (CDRAC), charged with monitoring progress in restructuring corporate debt. Chaired by the Bank of Thailand, CDRAC brings together the respective heads of the Board of Trade of Thailand, the Federation of Thai Industries, the Thai Bankers’ Association, the Association of Finance Companies, and the Foreign Banks’ Association, to monitor and facilitate private sector debt restructuring negotiations.

30. CDRAC’s role in monitoring and seeking to resolve the corporate debt problem has been progressively enhanced. At the outset, CDRAC’s scope was relatively limited and focussed on developing a framework for guiding voluntary debt restructuring—the so-called “Bangkok Approach” (Box 2)—which draws on the informal London Approach to debt restructuring developed in the UK. CDRAC has since formalized this framework through the establishment of inter-creditor agreements (following the example of Korea), to help speed up the resolution of disagreements among creditors, and so to expedite corporate restructuring. Despite initial opposition, in particular from some foreign banks, CDRAC has been successful in getting all domestic creditors and foreign creditors with branches in Thailand to sign on. This agreement formalizes existing elements of the Bangkok Approach, but also includes (i) firm timetables—backed up with the threat of fines imposed by CDRAC—for making progress in debt restructuring (such as deadlines for establishing a steering committee, appointing a lead creditor, calling meetings for voting on restructuring plans); (ii) scope for mediation between debtors and creditors; and (iii) if necessary, arbitration to resolve disagreements between creditors (Box 3).

31 In addition to setting out the framework for debt restructuring, CDRAC has concentrated on speeding up debt restructuring in some 700 key cases, covering loans of more than B 1.5 trillion. Claiming some success in promoting debt restructuring in these cases, and anticipating that significant progress in debt restructuring will be made by the first quarter of 2000 when the fixed timetables are expected to yield results, CDRAC has expanded its caseload to cover 1,700 indebted corporations, with credit outstanding of approximately B 2.1 trillion. This compares with total nonperforming loans in the system of around B 2.5 trillion. Also, to expedite the restructuring of debt owed by small and medium firms, CDRAC has simplified versions of its inter-creditor and debtor-creditor agreements, which already cover 2,800 debtors with credit outstanding of more than B 0.2 trillion.

The Bangkok Approach to Corporate Debt Restructuring 1/

Objective: Successful implementation of an informal framework outside bankruptcy proceedings for the efficient restructuring of the corporate debt of viable entities to benefit creditors, debtors, employees, shareholders and the Thai economy by: (i) minimizing losses to all parties through coordinated workouts, and (ii) avoiding companies being placed unnecessarily into liquidation, thereby preserving jobs and productive capacity wherever feasible.

  • 1. Corporate debt restructuring should achieve a business, rather than just a financial restructuring, to further the long-term viability of the debtor.

  • 2. Priority must be given to rehabilitating assets to performing status in 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 debtor’s management is providing full and accurate information on the agreed schedule and participating in all creditor committee meetings, creditors shall “standstill” for a defined, extendable period to allow informed decisions to be made.

  • 5. Both creditors and debtors must recognize the absolute necessity of active senior management involvement throughout the duration of the debt restructuring.

  • 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 process according to defined objectives and deadlines.

  • 7. In major multi-creditor cases, a steering committee representative of abroad 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 advisers are to be appointed, such entities 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 professional advisers, lead institutions and creditors’ committees 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 Corporate Debt Restructuring Advisory Committee shall have the role of following up developments in debt restructuring, facilitating debt restructuring for the public good, and acting as an intermediary in the particularly difficult cases of restructuring.

  • 13. Creditors’ existing collateral rights remain in force.

  • 14. New credit extended during the standstill period of the restructuring process on reasonable terms in order that the debtor may continue operations must receive priority status.

  • 15. Lenders should aim at recovering their claims through devising a plan with lower risk and hence lower interest rates, rather than through increased interest rates and imposition of restructuring fees.

  • 16. Trading of debt is appropriate under certain conditions, but the selling creditor has the professional obligation to ensure that the purchaser does not have a detrimental effect on the restructuring process.

  • 17. Restructuring losses should be apportioned in equitable manner, which recognizes legal priorities between the parties involved.

  • 18. Creditors retain the right to exercise independent commercial judgment and objectives 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 principles contained in this framework can be waived, amended or superseded in any particular restructuring with the consent of all participating creditors.

1/ Issued by the Corporate Debt Restructuring Advisory Committee, August 4, 1998.

The Debtor-Creditor and Inter-Creditor Agreements of March 1999

The Debtor-Creditor Agreement on the Debt Restructuring Process and the Inter-Creditor Agreement on Restructuring Plan Votes and Executive Decision Panel Procedures were jointly developed by the Association of Finance Companies, the Thai Bankers’ Association, and the Foreign Banks’ Association. The Agreements are binding contracts, which commit signatories to follow a set framework in debt restructuring, so as to expedite the process. After securing CDRAC approval, the Agreements were signed on March 19, 1999 by 34 local and 31 foreign financial institutions, and will come into force in individual restructuring cases once the target debtor signs the Debtor Accession form and so falls under the Debtor-Creditor Agreement.

Main Elements

The Agreements set out the debt restructuring process from the calling of the first creditors’ meeting, the provision of information by the debtor, to the proposal and voting on a restructuring plan, as outlined in the Bangkok Approach. Under the agreement, both debtors and creditors may use the CDRAC for technical advice and to mediate conflicts. Creditor signatories must vote on the proposed restructuring plans; if they choose to reject the plan they must make clear their reasons for objecting. If a majority of financial institutions (both by number and by credit) approve a restructuring plan, but this is less than the majority required under the Bankruptcy Act, the plan passes to an Executive Decision Panel (EDP) for binding arbitration among creditors.1 If there is no majority, inter-creditor arbitration is not enforced, and creditors must then file in court for loan collection, liquidation, or reorganization.

Expected Benefits

For debtors, set time schedules and a clear negotiating framework, the potential for mediation in cases of conflict, and the requirement that creditors not charge default interest if a credible restructuring plan is being developed, should encourage them to enter the debt restructuring process. For creditors, the Agreements are designed to ensure fair and equal treatment, access to complete and accurate information necessary for restructuring, and clearly set out time frames. In addition, creditors can be assured of a clear resolution on the restructuring plan, with the support of independent third parties for mediation—and, in the limit, arbitration—where necessary.

Source: Corporate Debt Restructuring Advisory Committee.

1 Failure to vote or comply with an approved plan may result in a warning letter or fine. However, a creditor may opt out of arbitration if it has over B 1 billion in outstanding claims.

C. Progress in Corporate Debt Restructuring

32. Since the onset of the crisis, there has been some gradual deleveraging of the economy. Measured at current exchange rates, corporate sector debt (external and mediated through the domestic financial system) has fallen from $153 billion at end-1997 to around $140 billion (116 percent of GDP) in mid-1999.3 External debt has fallen significantly, the counterpart to lower foreign debt rollover rates, and the consequence of Thailand’s move into current account surplus. The subsequent strengthening of the baht, together with significant debt repayment by the private sector, means that the proportion of foreign debt in total corporate debt is now considerably lower.

Table 3.

Progress in Debt Restructuring by Financial Institutions

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Source: Bank of Thailand.

33. Part of this deleveraging reflects the gradual progress that financial institutions have made in restructuring debt. Data reported by financial institutions to the Bank of Thailand show that just over B 1.9 trillion ($50 billion) in credit has entered the restructuring process. Out of this, almost 40 percent of the total has been restructured. This marks considerable progress since June 1998, when statistics on debt restructuring were first collected. Even so, the figures imply that there is considerable debt still to be restructured, particularly when set against total nonperforming loans of around B 2.5 trillion. And arguably the most difficult cases are still to come, as these inherently take the longest time. According to the official data, debt to be restructured has been concentrated in the manufacturing, real estate, services, and wholesale and retail sectors.4


Progress in Debt Restructuring

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A002

Source: Data reported by Financial Insilutions to BOT

34. State owned banks have been particularly slow in restructuring corporate debt. As of end-September, less than 20 percent of the debt owed to state banks had completed the restructuring process, as compared with a completion rate of more than 60 percent for private banks. This slow progress in part reflects the fear of state bank employees that they could be held liable for eroding the value of state assets (and thus subject to prosecution).

35. Evidence from CDRAC’s monitoring of its initial 700 target cases also indicates that progress is being made in debt restructuring, albeit slowly. So far only one-fifth of the total debt under CDRAC’s purview has been successfully restructured (excluding the B 160 billion, which remains current), and this includes cases where the debtor still has to sign on the agreement. An even larger amount, roughly one quarter of the debt, has lead to filings of court cases, indicating that the CDRAC process will be supplanted by court resolution or out of court resolution outside the auspices of CDRAC. Thus, resolution of the B 586 billion still in process will be crucial to making decisive progress in debt restructuring; according to the timetables set out in the Inter-Creditor and Debtor-Creditor agreements, results should be expected in the first quarter of 2000.

Table 4.

Progress in CDRAC target cases as of November 1999

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Source: CDRAC, Merrill Lynch.

36. Though the aggregate data suggest that gradual progress in debt restructuring is being made, evidence on the quality of debt restructuring remains scarce. Creditors are unwilling to publicize details of restructuring deals, both for reasons of confidentiality, and for fear of setting a “going rate” for debt reduction. The creation of such a rate would weaken the position of creditors in future debt negotiations, and could encourage further strategic loan defaults. Even so, anecdotal evidence suggests that much of the restructuring has essentially taken the form of interest payment rescheduling, with little reported reduction in the net present value of the loan. As a result, an estimated 15 percent of restructured loans end up turning nonperforming again. Such rescheduling often involves maturity extension, a 1-2 year grace period for principal repayment, and temporary interest rate reduction. Thus, in a sample 40 cases monitored by CDRAC there were only 3 cases involving (a very modest amount of) principal reduction, while there were some 33 cases involving maturity extensions. Banks are also reported to monitor cashflows regularly, and to have the option of modifying restructuring terms as necessary.5

37. Despite this evidence indicating that progress is being made in debt restructuring, headline NPL figures have fallen by much less. A number of factors explain this. First, exit of NPLs through restructuring has been partially offset by the entry of new NPLs. Second, part of the debt that has been restructured was already performing, but in danger of turning nonperforming. Third, bank reporting of NPLs and of restructured debt may simply be inconsistent. Fourth, part of the restructuring figures may include debts to foreign banks (and, in the CDRAC target cases, to foreign bondholders), whereas the headline NPL figures focus on domestic banks.

38. The reduction of interest rates and emergence of economic recovery should have helped reduce the headline NPL figures. Economic indicators have improved steadily through the year—most notably manufacturing production, exports, as well as consumption indicators. With the recovery, the financial results of nonbank corporations have also improved, aggregate sales rising almost 5 percent between the first and second quarter of 1999, the first increase since the onset of the crisis. Similarly, the aggregate margin of EBITDA (earnings before interest, taxation and depreciation) to interest payments for nonbank corporates has increased from 14 percent in 1998q3 to 23 percent in 1999q2—a further indication of corporates’ improved debt-servicing capability.


Earnings before interest and depreciation

(percent of interest expenses)

Citation: IMF Staff Country Reports 2000, 021; 10.5089/9781451836813.002.A002

39. This failure of NPLs to fall significantly despite improvements in profitability could indicate data misreporting, or the existence of “strategic” NPLs. Finding it difficult to access credit, some companies may have chosen not to repay debts, conserving cashflow to finance operations and investment (so-called “strategic” NPLs). An alternative approach to measuring NPLs suggests that this may be taking place. This alternative approach uses corporate balance sheet data to measure NPLs. Using corporate income statements, a firm can be considered as “NPL prone” if its earnings before interest are lower than interest obligations. On this basis, using a sample of some 240 nonfinancial corporations listed on the SET, staff calculations show that the number of NPL-prone companies rose from 48 immediately before the crisis (already quite high) to a peak of 141 at the end of 1998q2, before falling gradually to 84 a year later. Expressed in terms of share of liabilities, this measure of NPLs peaked at 54 percent in 1998q2 before falling back to 41 percent in mid-1999. Roughly speaking, one would have expected a proportionate decline in reported NPLs (as opposed to a rise in the official NPL rate from 36 percent to 51 percent).

Table 5.

Performance of Nonfinancial Private Corporations in Thailand

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Source : Data from the Stock Exchange of Thailand and compiled by Merrill Lynch Phalra

Profit is defined as an earning before interest, taxes, depreciation, and amortization (EBITDA).

Remaining challenges

40. Though success in debt restructuring is inherently difficult to ascertain, this should not detract from the considerable progress that has already been made in structural reform. With the decline in interest rates and the emergence of economic recovery, the prospects for corporates have improved significantly. Increased foreign participation has promoted the operational restructuring of corporations. This is most notable in the banking sector, where 6 out of the remaining 13 banks may soon be under foreign ownership (and where foreign participation in the others has also increased). But foreign acquisition and consolidation has also taken place in the insurance, property, construction materials, chemicals, and automobile sectors. Also, major efforts have been made to promote debt restructuring, through enactment of key legal reforms, assistance in recapitalization for banks, tax incentives, and the creation of CDRAC to facilitate out-of-court negotiations.

41. Many challenges remain, especially in the legal area, where the new framework for bankruptcy has yet to be tested. The main problem has been that creditors have been unwilling to file bankruptcy cases, other than with the agreement of the debtor.

  • Since the enactment of the rehabilitation chapter in April 1998, only 30 rehabilitation proceedings have been successfully commenced (as of November 11, 1999) and all of them have been effectively consensual—typically as a means of using majority power to enforce a pre-packaged bankruptcy agreement.

  • Though liquidation proceedings under bankruptcy have been more numerous—around 300 cases have been sent to the new Bankruptcy Court—they are still small compared to the roughly 240,000 NPL cases in the country. Most cases have involved individuals. In those cases where the debtor is an enterprise, they have been limited to circumstances where there is no chance of rehabilitation and the owners of the enterprise have not actively resisted liquidation.

42. Thus there seem to be no cases where creditors have initiated insolvency proceedings over the objections of a recalcitrant corporate debtor. The (in)action of CDRAC creditors provide a clear illustration of this. If a debtor refuses to sign the debtor-creditor agreement, creditors are required (under the inter-creditor agreement) to take legal action against the debtor in question. Even though more than 130 debtors have not signed the debtor-creditor agreement, creditors have decided to meet their obligation by filing enforcement actions in civil court (including actions to foreclose on security and execute judgments) rather than by initiating insolvency proceedings. Reasons for avoiding insolvency proceedings are complex, ranging from legal considerations (ambiguities in the criteria under which bankruptcy can be commenced, problems associated with the appointment of planners, inadequate features for converting rehabilitation into liquidation cases), institutional constrains, and deficiencies in bank capital that dissuade financial institutions from carrying out bankruptcy threats for fear of exposing inadequate provisioning (Box 4). However, unless creditors demonstrate their willingness to use the bankruptcy law against recalcitrant debtors, a vital part of the framework for promoting out-of-court debt restructuring is lost.

43. Notwithstanding these institutional problems, the authorities’ hopes for more rapid progress in debt restructuring are pinned on CDRAC. Specifically, under the timetables agreed to by debtors and creditors when signing their inter-creditor and debtor-creditor agreements, debt restructuring in the first 700 target cases should be largely completed by the first quarter of 2000. This has raised market expectations that a significant breakthrough in corporate debt restructuring may be imminent.

44. CDRAC’s success in promoting debt restructuring will depend crucially on a number of factors. First, creditors and debtors will need to respect the deadlines set out in their respective agreements. Enforcement of these deadlines will depend crucially on CDRAC’s powers of moral suasion and its willingness to levy fines. Second, there needs to be trust in the mediation and arbitration services provided for in the CDRAC agreements. However, there have been delays in finding and financing mediation services, and in providing the technical expertise, on which the arbitration panel can draw when making its findings. Third, even if the timetables are adhered to, there is always the possibility that in the end no agreement is reached. Creditors are then required to file court cases: either a joint petition for collection of all their credits, or reorganization under new management or liquidation of the debtor. But this means the debt restructuring will fall to the courts, a lengthy process that has its own problems.

Why is Progress on Corporate Debt Restructuring So Slow?

Despite the measures that have been introduced to promote corporate debt restructuring, discussions with creditors, debtors, and practitioners point to a number of factors that continue to slow the debt restructuring process:

Legal obstacles

  • Lack of objective criteria for commencing bankruptcy proceedings. In many legal systems, failure to service debt is sufficient to establish debtor insolvency. However, Thailand’s courts also recognise balance sheet tests of insolvency. This allows debtors to not service their debts and yet claim solvency through judicious use of asset valuations.

  • Uncertainties in the planner process. In many countries, the courts appoint planners to rehabilitate companies. In Thailand the appointment of planners is more adversarial: unless three quarters of creditors can agree, the debtor appoints the planner. This uncertainty may dissuade both creditors and debtors from filing for bankruptcy. In addition, potential criminal liability for “excessive” fees and the possibility that planners might not be paid at all if their plan fails to secure necessary creditor approval impedes the planning process, and may impair the quality of debt restructuring.

  • Difficulties in converting unsuccessful rehabilitation into liquidation proceedings. The risk is that a nonviable debtor can use delays under rehabilitation to delay liquidation. Even worse, if the rehabilitation fails, all insolvency proceedings terminate, allowing the debtor to resume activities.

  • Foreclosure. Though the process has been speeded up, debtors can still challenge the results of the auction, by citing official prices established by the Land Department. In addition, different assets require different foreclosure procedures.

  • Securitization. The absence of a register of corporate security, and the narrow range of securitizable assets limits scope for the future extension of credit and, by making loans more risky, leads to unnecessarily high interest rates on loans.

Again, the point is not to use the legal system to restructure corporations. Rather it is to set clear rules so that outcomes are quick and predictable, which can then be used as a clear reference point for out of court negotiations.

Economic and institutional obstacles

  • Conflicts of interest between creditors—secured versus unsecured, domestic versus foreign, large (steering committee members) versus small—by their nature have the potential to delay agreement on debt restructuring plans. The introduction of inter-creditor agreements has been the main attempt to overcome this problem.

  • State owned financial institutions. Under current law, state employees have potential criminal liability for eroding the value of state assets. This makes it difficult for them to accept reductions in the value of their debt claims (even though in the end this might maximise recovery for the state).

  • Insufficient bank capital. Given inadequate provisioning, resulting from the heavy reliance on possibly overvalued collateral, banks are unwilling to restructure debts or to foreclose on assets, out of fear that the resulting write-down may expose their weak underlying capital position. As a result, domestic creditor-led restructurings are generally reschedulings, but with returns below cost of capital this may erode bank profitability in the future. Increased bank capital is thus a necessary—though not sufficient—condition for effective corporate debt restructuring.

Finally, creditors may be waiting for economic recovery to take hold before taking decisive action on restructuring. Recovery may improve the outlook for firms, reducing the size of the haircut (and the impairment of capital) that banks have to take; recovery should also raise asset prices, increasing the value that banks can recover from their loan collateral.

D. Conclusion

45. The authorities have made important steps in designing legal and institutional reforms that will promote corporate debt restructuring. Perhaps more important, if successful, the legal reforms will strengthen market relations in Thailand and increase the efficiency of credit allocation. The CDRAC process will soon face its first crucial test, as the deadlines for debt restructuring in its first 700 target cases come due. With economic recovery, the corporate situation has clearly improved. The key now is to ensure that this improvement in ability is matched by an increased willingness to pay by debtors, i.e., by enforcement of property rights.


Prepared by Mark Griffiths and Toshihide Endo (both APD).


These numbers exclude debt instruments such as bills of exchange and commercial paper, and are calculated using an end-1997 exchange rate of B 47=$1. Almost half of the foreign debt was held by Japanese creditors, just under 20 percent by U.S., and 5-10 percent each by the U.K., France, and Germany.


These figures exclude credit extended by closed finance companies, thus exaggerating somewhat the extent of the debt reduction.


However, this classification should not be taken too literally as it is based on the identity of the borrower, which may be different from the sector in which the project was financed.


The unwillingness of banks to accept principal reductions raises concerns that restructured debts will need to be renegotiated; if banks retain the right to renegotiate if the company’s position improves, this will reduce the incentive of the company to earn profits.

Thailand: Selected Issues
Author: International Monetary Fund