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Prepared by Vikram Haksar and Piyabha Kongsamut.
The paper analyzes firm level data using companies listed on the Stock Exchange of Thailand (SET) as a proxy for the broader corporate sector. Listed companies account for about a quarter of total private non-household borrowing.
The interest coverage ratio is earnings before interest and taxes divided by total interest expenses. With a coverage ratio less than 1, a firm is unable to fully service all its debts.
This was reflected by a clear upward break in the trend of real GDP as well as capital output ratio during the period 1992–96, the so-called bubble years.
The rapid growth of Thai debt during this period was evinced by the increase in the leverage ratio from 71 percent at end-1992, to 155 percent by end-1996 (Pomerleano, 2001).
About 30 percent of corporate debt was foreign currency denominated at end-1996. The share jumped to over 40 percent by end-1997 reflecting the devaluation, but has since declined to just over 20 percent as of end-2001.
For a discuss of CDRAC and the “Bangkok Approach” to debt restructing, see SM/99/304. The main features of the TAMC are dicussed in SM/01/232.
They analyze the role of non-financial firm-specific factors (e.g. sales growth, size), financial structure (initial leverage and liquidity, ownership concentration), and institutional environment (equity rights, creditor rights and judicial efficiency), as well as country and industry effects.
Distressed assets are defined here as on balance sheet NPLs, plus NPLs transferred to off balance sheet AMCs, plus the written off portion of fully provided NPLs. The lack of detailed information on restructuring means that this definition is likely an upper bound. While banks already had adequate reserves for the write-offs, in many cases these have not translated into debt reduction for corporates reflecting unfinished troubled debt resolution.
The focus of the firm level analysis here on the listed company sector introduces important caveats to generalizing from these findings. But data from other sources suggests that performance among SMEs is not superior to that of listed companies (see SM/01/232).
Listed companies that are experiencing financial difficulty and meeting some specific criteria on profitability and net worth, can be moved to the so-called “Rehabilitation” board of the SET. They are then removed from their specific industry sub-category of the SET index. In principle, this would typically constitute a first step towards delisting. But most companies under rehabilitation have continued to be listed.
The largest debtor in this category is Thai Petrochemical Industries (TPI), which accounted for 8 percent of total debt in 2001.
These include communication, entertainment and recreation, energy, household goods, agribusiness, food and beverages, electronic components, chemicals and plastics, and commerce.
The TPI bankruptcy case, the largest in Thailand, remains important, but an exception. Total new equity raised since the crisis by firms reporting to the SEC (Securities and Exchange Commission) amounts to about $14 billion, some 35 percent of average market capitalization. But of this, approximately $10 billion has been raised by private commercial banks. This leaves a much smaller share raised by the private non-financial sector. Moreover, merger and acquisition activity has been mostly absent. The value of mergers approved by the SEC since the crisis has amounted to less than 2 percent of market capitalization.
The capacity utilization index must be interpreted with caution. Anecdotal evidence suggests that the installed capacity of plants that are no longer producing is still included in computation of the ratio. This would tend to bias downwards the utilization index. But it is unclear whether the financial losses associated with the implied economic depreciation of installed capital have been fully realized. In this context, the currently measured low level of capacity utilization could still provide useful information on the extent of losses yet to be realized to reflect the shutting down of defunct capital stock.
While an inherently difficult comparison, the figure attempts to present benchmark in the form of longer run avareges the smooth out cyclical effects. Thus, data on Thiland spanning the post crisis recovery are compared with data from other countries over a time period spanning global business cycle.