Abstract
This Selected Issues paper and Statistical Appendix examines the channels of monetary policy transmission in Thailand. The main findings are that changes in monetary policy are associated with changes in real output, and that the main channel for transmission is not bank lending but asset prices. The paper takes stock of the performance of the Thai corporate sector emerging from the crisis and discusses remaining challenges and vulnerabilities. An assessment of Thailand’s fiscal vulnerability is also presented.
III. Corporate Performance in Thailand1
A. Introduction
1. Recent crises in emerging markets have highlighted the role of the corporate sector in transmitting financial shocks to the macroeconomy. Prior to the Asian crisis, growth in the regional emerging market countries was driven by private investment, financed mostly by bank lending. In Thailand, growth accelerated in the 1990’s on the back of large capital inflows, ultimately driving an investment and asset price bubble. The financial crisis triggered by the baht devaluation in 1997 was followed by a slump in economic activity. Firms found themselves unable to service their debt in an environment of weak aggregate demand and a sharply higher cost of capital. Their crippled position was reflected in the rising level of non-performing loans held by financial institutions, undermining the stability of the financial system, and feeding back into an intensification of the downturn.
2. This paper takes stock of the performance of the Thai corporate sector in emerging from the crisis and discusses remaining challenges and vulnerabilities. Aggregate economic growth resumed in Thailand in 1999. However, the rebound has not been as strong as in other countries in the region. This reflects in part the unfinished task of corporate restructuring, mirrored in the still high burden of distressed assets in the financial sector (on the order of 35 percent of GDP).
3. The main findings of the paper are:2
Debt levels, though high, have fallen from post-crisis peaks, while returns and corporate cash flows have slowly stabilized. Profitability has recently picked up, though cash flow remains weak and still volatile. Interest coverage ratios continue to hover just above 1, the break-even point for firms on a cash flow basis.3
The aggregate picture masks significant firm-level variation. Not all firms in the sample are still highly leveraged. Indeed, more than half of the firms (mostly smaller firms) have reduced their debt ratios to pre-crisis levels. At the same time, a substantial subset of especially larger firms is still highly leveraged.
4. These findings support the following policy implications:
Weakness in the aggregate corporate sector remains, and has substantial macroeconomic implications. But the strength of a broad base of firms is encouraging. While the financial implications of dealing with big troubled debtors are of course substantial, the coordination problems are much reduced.
The true extent of excess capacity can best be found through a market-based process. It is hard to gauge the full extent of the remaining debt over-hang, the financial counterpart to excess capacity. The key is to set up an institutional framework and incentive structure that facilitates price discovery of assets and an efficient sharing of the costs associated with restructuring.
B. Background
5. Thai corporates borrowed heavily in the 1990’s, sustaining growth rates that were very high by international standards. Thailand had grown fast during 1970–90 reflecting a pattern of export-led growth, high savings and stable macroeconomic policies. In the early 1990’s, on the back of capital account liberalization, substantial foreign savings were intermediated through the financial system leading to a surge in growth, investment and asset prices.4 Investment by firms grew at an average of about 30 percent per annum during this period, faster than most other countries in the region (Text Figure). While growth was debt-financed across Asia, the resulting skewed capital structure was particularly pronounced in Thailand, reflected in high debt-equity levels even before the crisis (Text Figure).5 Moreover, an increasing share of private corporate debt was denominated in foreign currencies, and largely unhedged as firms bet on the stability of the baht peg.6
Average Change In Nominal Fixed Assets, 1992-96
Source: World Bank. Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Average Change In Nominal Fixed Assets, 1992-96
Source: World Bank. Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Average Change In Nominal Fixed Assets, 1992-96
Source: World Bank. Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Debt to Equity Ratios, 1996
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Debt to Equity Ratios, 1996
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Debt to Equity Ratios, 1996
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
6. Returns on investment were declining already before the crisis while corporate liquidity was also coming under pressure. While there was a bona fide asset bubble involving real estate and share prices, the factors driving the broader surge in corporate investment have been widely debated. Much attention has fallen on weaknesses in bank supervision, large capital inflows, and the exchange rate regime. From a corporate finance perspective, the governance structure of family-owned Asian conglomerates is often cited as a motivating factor behind a focus on growth through debt (see discussion in ¶9). In such a model of corporate governance, there is little outside pressure for immediate return on investment. This mode of organization may well have been appropriate at an early stage of development and worked well in an environment of high growth. However, vulnerabilities were growing insofar as firms borrowing externally without hedging their exposure were not internalizing the true cost of capital. Meanwhile interest coverage ratios in Asia and especially in Thailand were dipping to dangerously low levels.
Return on Assets, 1992-96
(percent, quarterly)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Return on Assets, 1992-96
(percent, quarterly)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Return on Assets, 1992-96
(percent, quarterly)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Interest Coverage Ratios, 1992-96 Avge.
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Interest Coverage Ratios, 1992-96 Avge.
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Interest Coverage Ratios, 1992-96 Avge.
Source: World Bank, Financial Times
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
7. The substantial depreciation of the exchange rate following the crisis effectively bankrupted a large part of the Thai corporate sector. While debt levels were already high prior to 1997, the doubling of the baht-dollar exchange rate during 1997 wiped out the capital of many firms. The cost of servicing unhedged foreign currency debt doubled, while the temporarily high interest rates used to manage the depreciation of the exchange rate also caused an increase in debt service on local currency liabilities. Leverage shot up, while interest coverage ratios for many companies dropped to levels that would ultimately drive the large increase in NPLs in the banking system.
Leverage Ratios, 1992-99
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Leverage Ratios, 1992-99
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Leverage Ratios, 1992-99
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
8. The authorities initially opted for a more private sector-led approach to corporate restructuring, and only recently established a central AMC. While direct state intervention in the financial sector was substantial, the strategy for corporate debt restructuring revolved around facilitating private party resolution. A first round of reforms of the legal framework for debt restructuring was undertaken in the wake of the crisis. The main measures included passage of an important new bankruptcy law and procedures to expedite the foreclosure process. The voluntary Corporate Debt Restructuring Advisory Committee (CDRAC) process (now winding down) was set up to help bring debtors and creditors to the negotiating table. At its peak, CDRAC was advising on deals worth almost 50 percent of GDP. More recently in 2001, the Thai Asset Management Corporation (TAMC) was established. The TAMC has taken over most of the non-performing loans from the state-owned banks, and has been granted special powers to speed up the asset resolution process.7
C. The Problem with Leverage
9. High leverage can reflect poor corporate governance. The theoretical literature on choice of capital structure is wide ranging and points to different costs and benefits of issuing debt (See Box III.1). In general, the optimal capital structure depends on the specific circumstances of the firm and overall development of the capital market infrastructure. From the Asian perspective, a particularly relevant strand of the literature focuses on corporate governance. It could be argued that “insiders”—in this case often the founding family—exerted too much control over firms that outgrew family-based management. As such, Asian conglomerates eventually focused more on size and market share while downplaying return on investment. Further, insiders were more likely to use outside debt financing as opposed to raising equity and diluting their ownership control. In this scheme, high leverage is ultimately a symptom of weak governance.
10. Leverage also exposes firms to risks in the event of economic volatility Another important part of the literature focuses on financial fragility, especially arising from debt. Pioneering risk assessment models by Altman (1977 and 1993) established a modeling framework for assessing the probability of firms entering into bankruptcy. In particular, the level, maturity and repricing structure of debt are considered to be important variables affecting the credit-worthiness of companies. For example, ratings agencies apply standard criteria when assessing companies, many of which center around the riskiness of the firms’ capital structure as compared to average historical risk. The Text Table gives some of the standards applied by S&P in rating US corporates. While international differences in historical volatility reduce the cross-country applicability of these standards, they do provide a flavor of the relatively weak position of Asian firms.
Standard and Poors Required Financial Ratios
(By rating level, percent)
Standard and Poors Required Financial Ratios
(By rating level, percent)
| AAA | AA | A | BBB | BB | B | |
|---|---|---|---|---|---|---|
| Interest coverage ratio | 20.3 | 14.9 | 8.5 | 6.0 | 3.6 | 2.3 |
| Long-term Debt/Capital | 13.4 | 21.9 | 32.7 | 43.4 | 53.9 | 65.9 |
| Total debt/capital | 23.6 | 29.7 | 38.7 | 46.8 | 55.8 | 68.9 |
Standard and Poors Required Financial Ratios
(By rating level, percent)
| AAA | AA | A | BBB | BB | B | |
|---|---|---|---|---|---|---|
| Interest coverage ratio | 20.3 | 14.9 | 8.5 | 6.0 | 3.6 | 2.3 |
| Long-term Debt/Capital | 13.4 | 21.9 | 32.7 | 43.4 | 53.9 | 65.9 |
| Total debt/capital | 23.6 | 29.7 | 38.7 | 46.8 | 55.8 | 68.9 |
Why Do Firms Issue Debt and When Does It Become a Problem?
The literature on capital structure suggests that the issuance of debt carries both benefits and costs. Building on the pioneering work by Modigliani and Miller (1958), some of the main strands of literature revolve around the implications of agency costs, asymmetric information, and risk management.1
Agency costs illustrate the various possible conflicts of interest between managers, shareholders, and debt-holders (Jensen and Meckling (1976)). Issuing debt to solve one agency cost problem may give rise to a different incentive compatibility problem. Whereas the conflict of interest between managers and shareholders suggests that issuing debt should be beneficial (add to firm value) by better aligning the manager’s interests with those of the shareholders, agency costs of debt are also found in the conflict of interest between debt-holders and equity-holders. This conflict may lead to suboptimal investment decisions (the underinvestment problem), as equity-holders may not reap the full benefits from undertaking good projects. For example, when firms are close to bankruptcy, there is little incentive for shareholders to inject more capital, as any improvement in performance will fully benefit the debt-holders only (the debt overhang problem highlighted by Myers (1977)). This line of models also suggests that firms with high growth opportunities would issue less debt, while firms with well-established cash flow would have higher debt (Jensen (1986)). A related implication is that firms with more tangible assets can support more debt and have higher market value, but would be more likely to default (Harris and Raviv (1990)).
Asymmetric information has also been identified as a motivating factor for firms to issue debt. This strand of the literature is based on the assumption that managers know more private information about the firm’s investment opportunities and future revenue stream. Debt may then be used as a signaling device for the quality of investment opportunities to the firm (Ross (1977)). Alternatively, given the costly nature of raising finance, firms raise funds according to a hierarchy, preferring first to undertake investments out of retained earnings, then to issue (riskless) debt, and only to issue new equity as a last resort (Myers and Majluf (1984)). This “pecking order” theory implies a negative relationship between debt and firm value, as high profit firms can finance future growth internally without resorting to issuing debt.
A related strand of the literature deals with risk management issues, including on the maturity structure, currency composition of debt, and hedging decisions. Some of the agency costs identified above are actually mitigated by the choice on the maturity structure of debt. For example, issuing more short-term debt can help eliminate the underinvestment problem by giving debt-holders control over renewed financing at relatively short intervals (Myers (1977)). This hypothesis implies that firms with high growth opportunities are likely to issue more short-term debt. Signaling hypotheses suggest that high-quality firms (with higher credit ratings) will issue more short-term debt.2 On the other hand, the finance literature appears largely silent on the issue of currency composition of debt. It notes mainly that firms that operate in many countries tend to issue foreign debt to better match asset and liability positions in their different countries of operation. However, the accumulation of foreign currency debt by domestic firms has been identified as an important contributing factor to some of the Asian crisis countries. By taking on external debt at the prevailing lower foreign interest rates, these firms made savings on their interest costs but exposed themselves to exchange rate risk (debt was mostly unhedged). After the shock hit, firms were unable to service their debt, with many still be suffering from this legacy.
Other determinants of corporate performance have also been identified in the literature, including diversification, ownership concentration, and corporate governance. Diversification may have advantages at certain levels of financial development, but could also become a weakness as firms expand into non-core areas and lose focus. Concentrated ownership has been seen as a method of control to help investors ensure some return on their investment, as another approach to solving the agency problem. However, ownership concentration can also create problems of its own, if majority shareholders try to expropriate resources for their own purposes to the detriment of the firm (Grossman and Hart (1988)). Solutions to this problem reach into the field of corporate governance, including mechanisms for investor protection (such as minority shareholder rights) and the legal and regulatory framework (such as information standards and disclosure requirements). Thus, higher standards on corporate governance should induce better performance.3
1 For a more extensive survey of the various strands of the literature on capital structure, see Harris and Raviv (1991).2 When the market cannot distinguish between good and bad borrowers, bonds will be mispriced (and the problem will be worse for longer-term debt). As a consequence, high quality firms will prefer to issue (better priced) short-term debt.3 For a survey on corporate governance issues, see Shleifer and Vishny (1997).11. In the wake of the crisis, the empirical corporate finance literature has begun to explore the sources of weaknesses in the Asian corporate sector. Research has generally focused on other possible weaknesses besides high debt, including the role of ownership structure and concentration, or the strength of corporate governance. Alba, Claessens and Djankov (1998), Wiwattanakantang (2001), and Suehiro (2001) focus on the ownership concentration issue in Thailand. The first paper finds a weakly negative relationship between ownership concentration and performance in listed companies, while the latter two papers dispute this finding. Suehiro (2001) does not formally test this empirical relationship, but provides stylized facts on ownership, debt, and performance within an extensive classification scheme for ownership in a larger sample of firms. Claessens, Djankov and Xu (2000) explore cross-country corporate performance of listed companies during the East Asian crisis, and highlight the role of institutional weaknesses (e.g. property rights, bankruptcy, and accounting procedures) in compounding the risk from weak firm financial structures before the crisis.8 While these papers do not focus in particular on the role of debt, leverage often enters as a control variable in the regression analysis, and the estimated coefficient on leverage is consistently negative (where the dependent variable is some measure of performance).9 In a related vein, Klapper et al (2001) find that the level of debt, but not its currency composition, is inversely correlated with performance.
12. Other studies have emphasized more strongly the impact of debt on corporate fragility. Dollar and Driemeier (2000) highlight the role of pre-crisis borrowing for Thai industrial firms, particularly short-term, even in the face of declining profitability. They also note that only a small proportion of firms were audited. Mulder et al (2002) and Ghosh and Ghosh (2002) explore the macroeconomic impact of shocks to corporate balance sheets, finding evidence of feedback between weak balance sheets and economic activity. High debt and weak governance are found to exacerbate the contractionary impact of currency crises. Heytens and Karacadag (2001) analyze Chinese corporate data and find that true liability levels are higher than apparent from bank and balance sheet data, reflected in low interest coverage and correspondingly higher vulnerability.
D. Recent Thai Corporate Performance
13. The Thai corporate sector remains among the most highly leveraged in the region. The slow progress in debt restructuring is mirrored in the continued high level of total distressed assets, which is used here as an indicator of the amount of troubled corporate debt that remains to be resolved.10 A similar pattern is reflected in measures such as debt-equity ratios, which have fallen further in some other countries.
Distressed Assets, 1999 vs. 2001
(In percent of Total loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distressed Assets, 1999 vs. 2001
(In percent of Total loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distressed Assets, 1999 vs. 2001
(In percent of Total loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
14. Debt levels, though high, have fallen from post-crisis peaks, while returns and corporate cash flows have slowly stabilized.11 Debt has fallen in part reflecting the stabilization of the exchange rate, though the overall level remains high. Fixed asset ratios also remain high, though these can be distorted by valuation effects. However, the share of input costs to final sales, considered an indicator of underlying profitability and efficiency, also remains elevated. Meanwhile, corporate profitability has picked up, though returns and cash flow remain modest and still volatile. Troublingly, interest coverage ratios continue to hover just above 1, the break-even point for firms on a cash flow basis.
Corporate Sector Indicators, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Corporate Sector Indicators, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Corporate Sector Indicators, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Returns and Cashflow, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Returns and Cashflow, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Returns and Cashflow, 1992-2002
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
15. The aggregate picture presented above masks significant firm-level variation. Figure III. 1 shows the difference between the medians and aggregated debt measures for all firms. The charts suggest that not all firms in the sample are still highly leveraged. Indeed, more than half of the firms (mostly smaller firms) have reduced their debt ratios to pre-crisis levels, and have done so at a faster pace than the aggregated figures suggest. At the same time, the large difference between the aggregate and the median figures that has persisted since 1997 shows that a substantial subset of especially larger firms is still highly leveraged.
16. The difference between the aggregate and firm-level financial position is borne out by looking at the distribution of key ratios across firms. The distribution of leverage ratios through time (the text figures below show the debt-equity and debt-asset ratios) shows the expected rightward shift during the crisis as the exchange rate depreciated increasing the baht value of foreign currency denominated debt. The distributions have since shifted back with current modes even lower than pre-crisis levels. However, the fatter tails at both ends of the distributions indicate the increased dispersion in leverage arising in the wake of the crisis. The increased number of highly leveraged firms is what drives the divergence between the aggregate and median ratios. Moreover the distributions below are not weighted by size. Thus the divergence between aggregate and median ratios shows that some large companies remain troubled and highly indebted.
Distribution or Debt-Equity Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution or Debt-Equity Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution or Debt-Equity Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution of Debt-Asset Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution of Debt-Asset Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution of Debt-Asset Ratio, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
17. Debt held by firms that have been under rehabilitation appears to account for a significant portion of this disparity between median and aggregate debt measures. Figures III.2 and III.3 show aggregate and median (respectively) debt ratios calculated for various sub-samples of firms, with a clear divergence emerging across the different splits. Firms that have been under SET rehabilitation12 (weak firms) have continuing high debt, more volatile performance, and continued poor cash flow positions. They also hold higher proportions of fixed assets (relative to sales), and have suffered from very weak interest cover for some time. These firms accounted for around 25 percent of total debt in 2001, but only 12 percent in assets and 10 percent in sales (Table III.1).13
Median vs. Aggregate Corporate Performance Measures
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The figures are not annualized.2/ Quick ratio = (current assets - inventory)/current liabilities.3/ Earnings before interest and taxes divided by interest expense.Median vs. Aggregate Corporate Performance Measures
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The figures are not annualized.2/ Quick ratio = (current assets - inventory)/current liabilities.3/ Earnings before interest and taxes divided by interest expense.Median vs. Aggregate Corporate Performance Measures
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The figures are not annualized.2/ Quick ratio = (current assets - inventory)/current liabilities.3/ Earnings before interest and taxes divided by interest expense.
Aggregate Corporate Performance Measures 1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio= (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.Aggregate Corporate Performance Measures 1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio= (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.Aggregate Corporate Performance Measures 1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio= (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.
Median Corporate Performance Measures1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point. “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio = (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.Median Corporate Performance Measures1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point. “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio = (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.Median Corporate Performance Measures1/
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
1/ The label “hd healthy” refers to firms with high debt that have never been in “rehabilitation”. High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample. “Weak” firms are those that have been in “rehabilitation”, as defined by the SET, at some point. “Healthy” firms are those that have never been in rehabilitation.2/ The figures are not annualized.3/ Quick ratio = (current assets - inventory)/current liabilities.4/ Earnings before interest and taxes divided by interest expense.18. High debt firms that have never been under rehabilitation status also play a role in explaining the gap between the median and aggregate debt measures. High debt firms are here defined as firms with debt-equity ratios in the upper quartile of the sample. Their median performance has lagged that of the full sample, including on return on assets, liquidity measures, and interest coverage (Figures III.2 and III.3). These firms are found in sectors that would be expected to have more tangible assets (real estate, capital-intensive manufacturing).14
19. Similarly, the aggregate profitability data obscure interesting firm-level dynamics. Again as expected, the distribution across firms of returns on assets shifted to the left during the crisis, with a fattening of the negative tail (Text Chart). (Indeed it is interesting to note that even in 1994, a sizeable number of firms were losing money). With the economic pick up, the distribution has shifted right again into more positive territory. While the mode is similar to that prior to the crisis, the slightly fatter negative tail again points to the presence of the still higher number of loss-making firms. Aggregate profitability remains modest, at about a 3½ percent ROA in 2001.
Distribution of Return on Assets, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution of Return on Assets, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distribution of Return on Assets, 1994-2001
(Kernel density estimates; frequency in percent on vertical axis)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
20. Analysis of data on interest coverage suggests that the level of corporate debt under stress remains higher than reflected in the headline NPL figures. An interest coverage multiple below 1 implies that firms are not generating adequate net cash flow to service fully their debt. This has typically been used by market analysts as a threshold to categorize all such firms’ liabilities as “implied NPLs”. The text chart presents the value of total liabilities held by firms whose coverage multiple is less than 1, as a share of total listed company liabilities for the quarter in question. As can be seen this ratio has not fallen since the peaks during the crisis, and remains above both NPL and distressed asset ratios. While it is not possible to map directly from listed company data to the broader sample of the financial sector data on NPLs/distressed assets, the analysis is still sobering. Certainly a large portion of listed company liabilities are held by firms that still face debt-service difficulties.
Distressed Asset and NPL Ratios
(percent of total loans/liabilites; Figures are moving averages)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distressed Asset and NPL Ratios
(percent of total loans/liabilites; Figures are moving averages)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Distressed Asset and NPL Ratios
(percent of total loans/liabilites; Figures are moving averages)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
E. Progress on Corporate Debt Restructuring
21. Financial institutions have reported restructuring a substantial volume of nonperforming corporate debt. Large portions of claims were negotiated under the auspices of the CDRAC process, with a completion rate of over 50 percent. But this has still left troubled debt worth about 25 percent of GDP to be dealt with in the over-burdened court system. Moreover, the sustainability of the debt restructuring achieved under the CDRAC process remains to be demonstrated. The continued re-entry of previously restructured NPLs is a testament to this concern.
Status of CDRAC Target Debtors, June 2002
(Total debt of baht 2.6 billions)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Status of CDRAC Target Debtors, June 2002
(Total debt of baht 2.6 billions)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Status of CDRAC Target Debtors, June 2002
(Total debt of baht 2.6 billions)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
22. Still high corporate debt levels reflect that much debt restructuring has involved debt rescheduling and less debt reduction. The difficulties in pursuing adversarial bankruptcy proceedings and slow pace of foreclosure have undermined the ability of creditors to convert debt into equity in the process of restructuring. While debt restructuring is an inherently iterative process, creditors also face incentives to stretch out the process of loss recognition and so conserve capital. As such, there has been little NPV reduction in the face value of debt, whether through debt-equity conversion, or debt and debt service reduction. Thus both corporate leverage and its financial sector counterpart, distressed assets, remain high. This is evinced by available data on the terms of completed debt restructurings shown in the following text charts.
Breakdown of Loan Restructuring Methods for That Banks, 2000
(percent at cases using at least one of the below methods)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Breakdown of Loan Restructuring Methods for That Banks, 2000
(percent at cases using at least one of the below methods)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Breakdown of Loan Restructuring Methods for That Banks, 2000
(percent at cases using at least one of the below methods)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Average Write-offs on Debt Restructured, 1998-2001
(percent of Case value of loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Average Write-offs on Debt Restructured, 1998-2001
(percent of Case value of loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Average Write-offs on Debt Restructured, 1998-2001
(percent of Case value of loans)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
23. Evidence on adjustment in the real sector is also mixed. There has certainly been exit of listed companies, particularly in those sectors most clearly identified with the asset price bubble—the finance companies and real estate related businesses. Also employment in the industrial and service sectors has been reduced. Moreover, there has been substantial new capital raised in the banking sector resulting in significant dilution of existing owners, though in no case of the largest banks has there been any change in control. However, comparatively little equity has been raised in the broader corporate sector and corresponding anecdotal evidence suggests that ownership remains mostly unchanged.15 Comparatively little exit has been reported in the manufacturing sector and, most tellingly, capacity utilization remains low when compared with pre-crisis levels.16
Exit of Listed Companies
Exit of Listed Companies
| Jan. 1997 | Feb. 2002 | Change | |||
|---|---|---|---|---|---|
| Total Listed Companies | 454 | 380 | −74 | ||
| Main sectors | |||||
| of which: | |||||
| Finance and securities | 52 | 23 | −29 | ||
| Property development | 44 | 24 | −20 | ||
| Building materials | 35 | 12 | −23 | ||
| Agribusiness | 29 | 20 | −9 | ||
| Food and beverage | 29 | 22 | −7 | ||
Exit of Listed Companies
| Jan. 1997 | Feb. 2002 | Change | |||
|---|---|---|---|---|---|
| Total Listed Companies | 454 | 380 | −74 | ||
| Main sectors | |||||
| of which: | |||||
| Finance and securities | 52 | 23 | −29 | ||
| Property development | 44 | 24 | −20 | ||
| Building materials | 35 | 12 | −23 | ||
| Agribusiness | 29 | 20 | −9 | ||
| Food and beverage | 29 | 22 | −7 | ||
Capacity Utilization Rate, 1995-2002
(percent)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Capacity Utilization Rate, 1995-2002
(percent)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Capacity Utilization Rate, 1995-2002
(percent)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
F. Conclusion
24. The corporate sector, while recovering, appears fragile and vulnerable to potential adverse shocks in the future. Performance has improved but remains somewhat volatile, debt levels are still high, and capacity utilization is weak. Many firms are still exposed to shocks from a slowdown in demand, higher interest rates and a weakening of the exchange rate, with adverse implications for macroeconomic and financial stability.
25. While the aggregate listed company sector remains strained, many firms appear well on the road to recovery. The preceding firm level analysis suggests that the problems in the Thai listed corporate sector are concentrated in some large troubled conglomerates that expanded too rapidly in the bubble years, many with a capital structure particularly exposed to foreign debt. Thus weakness in the aggregate corporate sector remains, and has substantial macro-economic implications. But the strength of a broad base of other firms (including many smaller companies) is encouraging and suggests that a targeted debt restructuring strategy could have large pay-offs. While the financial implications of dealing with big debtors are of course substantial, the coordination problems are much reduced.
26. The true extent of the remaining need for a reduction in excess capacity can best be found through a market-based process. It is hard to gauge the full extent of the remaining debt over-hang, the financial counterpart to excess capacity. Despite recent gains, the relatively low post-crisis rate of return on capital in Thailand compared with some international benchmarks is suggestive of unresolved problems.17 But this is a fundamentally microeconomic restructuring process that must work its way through in time. The key is to set up an institutional framework and incentive structure that facilitates price discovery of assets and facilitates an efficient sharing of the costs associated with restructuring, whether through losses at banks or ownership changes and exit in the real sector.17 While an inherently difficult comparison, the figure attempts to present benchmarks in the form of longer run averages that smooth out cyclical effects. Thus, data on Thailand spanning the post-crisis recovery are compared with data from other countries over a time period spanning a global business cycle.
Return on Assets, 1988-96 average
(percent median, local currency)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Return on Assets, 1988-96 average
(percent median, local currency)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Return on Assets, 1988-96 average
(percent median, local currency)
Citation: IMF Staff Country Reports 2002, 195; 10.5089/9781451836783.002.A003
Composition of Corporate Balance Sheets Across Different Sample Splits
Healthy firms are those that have never been in “rehabilitation”, as defined by the SET.
Weak firms are those that have been in. “rehabilitation” at some point.
High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample.
Companies that are currently in “rehabilitation”.
Composition of Corporate Balance Sheets Across Different Sample Splits
| Full sample | Healthy firms 1/ | Weak firms 2/ | High debt, healthy firms 3/ | High debt, weak firms | Rehabco firms 4/ | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| # (yr end) | Percent | Debt | Assets | Sales | Number | Debt | Assets | Sales | Percent | Debt | Assets | Sales | Percent | Debt | Assets | Sales | Percent | Debt | Assets | Sales | |
| 1992 | 337 | 78.0 | 82.2 | 81.3 | 84.8 | 22.0 | 17.8 | 18.7 | 15.2 | 17.2 | 47.7 | 35.7 | 34.7 | 7.7 | 9.0 | 5.5 | 5.6 | … | … | … | … |
| 1993 | 356 | 78.4 | 79.5 | 80.1 | 85.1 | 21.6 | 20.5 | 19.9 | 14.9 | 17.7 | 42.7 | 31.9 | 37.9 | 7.3 | 10.7 | 6.2 | 5.9 | … | … | … | … |
| 1994 | 360 | 78.1 | 77.2 | 78.2 | 83.9 | 21.9 | 22.8 | 21.8 | 16.1 | 15.8 | 38.4 | 28.4 | 27.8 | 9.2 | 11.6 | 10.3 | 9.2 | … | … | … | … |
| 1995 | 359 | 78.0 | 75.5 | 77.3 | 82.9 | 22.0 | 24.5 | 22.7 | 17.1 | 13.4 | 30.9 | 23.2 | 27.9 | 11.4 | 15.0 | 11.5 | 8.4 | … | … | … | … |
| 1996 | 366 | 78.4 | 73.3 | 76.6 | 83.3 | 21.6 | 26.7 | 23.4 | 16.7 | 13.1 | 31.6 | 25.2 | 28.2 | 11.7 | 14.4 | 11.1 | 9.6 | … | … | … | … |
| 1997 | 360 | 77.8 | 68.0 | 73.2 | 87.3 | 22.2 | 32.0 | 26.8 | 12.7 | 16.7 | 32.1 | 30.8 | 24.5 | 8.3 | 13.6 | 13.2 | 4.2 | 6.4 | 10.3 | 7.4 | 5.1 |
| 1998 | 346 | 80.1 | 70.6 | 78.4 | 88.4 | 19.9 | 29.4 | 21.6 | 11.6 | 17.9 | 42.1 | 37.2 | 32.9 | 6.9 | 8.3 | 7.2 | 2.1 | 13.0 | 14.0 | 7.5 | 3.3 |
| 1999 | 327 | 81.3 | 69.4 | 81.5 | 88.3 | 18.7 | 30.6 | 18.5 | 11.7 | 21.1 | 47.8 | 44.4 | 41.4 | 3.7 | 11.4 | 10.5 | 7.8 | 14.1 | 17.1 | 7.0 | 3.0 |
| 2000 | 323 | 82.4 | 70.5 | 86.1 | 88.1 | 17.6 | 29.5 | 13.9 | 11.9 | 22.9 | 49.0 | 46.9 | 39.0 | 1.9 | 0.5 | 0.5 | 0.8 | 13.0 | 16.3 | 5.7 | 2.5 |
| 2001 | 300 | 85.0 | 75.5 | 88.0 | 90.3 | 15.0 | 24.5 | 12.0 | 9.7 | 22.0 | 49.7 | 44.1 | 34.1 | 3.0 | 8.7 | 6.5 | 6.9 | 13.3 | 24.1 | 11.4 | 8.1 |
Healthy firms are those that have never been in “rehabilitation”, as defined by the SET.
Weak firms are those that have been in. “rehabilitation” at some point.
High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample.
Companies that are currently in “rehabilitation”.
Composition of Corporate Balance Sheets Across Different Sample Splits
| Full sample | Healthy firms 1/ | Weak firms 2/ | High debt, healthy firms 3/ | High debt, weak firms | Rehabco firms 4/ | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| # (yr end) | Percent | Debt | Assets | Sales | Number | Debt | Assets | Sales | Percent | Debt | Assets | Sales | Percent | Debt | Assets | Sales | Percent | Debt | Assets | Sales | |
| 1992 | 337 | 78.0 | 82.2 | 81.3 | 84.8 | 22.0 | 17.8 | 18.7 | 15.2 | 17.2 | 47.7 | 35.7 | 34.7 | 7.7 | 9.0 | 5.5 | 5.6 | … | … | … | … |
| 1993 | 356 | 78.4 | 79.5 | 80.1 | 85.1 | 21.6 | 20.5 | 19.9 | 14.9 | 17.7 | 42.7 | 31.9 | 37.9 | 7.3 | 10.7 | 6.2 | 5.9 | … | … | … | … |
| 1994 | 360 | 78.1 | 77.2 | 78.2 | 83.9 | 21.9 | 22.8 | 21.8 | 16.1 | 15.8 | 38.4 | 28.4 | 27.8 | 9.2 | 11.6 | 10.3 | 9.2 | … | … | … | … |
| 1995 | 359 | 78.0 | 75.5 | 77.3 | 82.9 | 22.0 | 24.5 | 22.7 | 17.1 | 13.4 | 30.9 | 23.2 | 27.9 | 11.4 | 15.0 | 11.5 | 8.4 | … | … | … | … |
| 1996 | 366 | 78.4 | 73.3 | 76.6 | 83.3 | 21.6 | 26.7 | 23.4 | 16.7 | 13.1 | 31.6 | 25.2 | 28.2 | 11.7 | 14.4 | 11.1 | 9.6 | … | … | … | … |
| 1997 | 360 | 77.8 | 68.0 | 73.2 | 87.3 | 22.2 | 32.0 | 26.8 | 12.7 | 16.7 | 32.1 | 30.8 | 24.5 | 8.3 | 13.6 | 13.2 | 4.2 | 6.4 | 10.3 | 7.4 | 5.1 |
| 1998 | 346 | 80.1 | 70.6 | 78.4 | 88.4 | 19.9 | 29.4 | 21.6 | 11.6 | 17.9 | 42.1 | 37.2 | 32.9 | 6.9 | 8.3 | 7.2 | 2.1 | 13.0 | 14.0 | 7.5 | 3.3 |
| 1999 | 327 | 81.3 | 69.4 | 81.5 | 88.3 | 18.7 | 30.6 | 18.5 | 11.7 | 21.1 | 47.8 | 44.4 | 41.4 | 3.7 | 11.4 | 10.5 | 7.8 | 14.1 | 17.1 | 7.0 | 3.0 |
| 2000 | 323 | 82.4 | 70.5 | 86.1 | 88.1 | 17.6 | 29.5 | 13.9 | 11.9 | 22.9 | 49.0 | 46.9 | 39.0 | 1.9 | 0.5 | 0.5 | 0.8 | 13.0 | 16.3 | 5.7 | 2.5 |
| 2001 | 300 | 85.0 | 75.5 | 88.0 | 90.3 | 15.0 | 24.5 | 12.0 | 9.7 | 22.0 | 49.7 | 44.1 | 34.1 | 3.0 | 8.7 | 6.5 | 6.9 | 13.3 | 24.1 | 11.4 | 8.1 |
Healthy firms are those that have never been in “rehabilitation”, as defined by the SET.
Weak firms are those that have been in. “rehabilitation” at some point.
High debt is defined as a debt-to-equity ratio in the upper 25th percentile of the sample.
Companies that are currently in “rehabilitation”.
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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.
Some studies have focused on the determinants of corporate debt in various countries, for example Wiwattanakantang (1999, Thailand) and Lee et al (2000, Korea).
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.
