With anywhere between $2 billion and $5 billion of exposure to the 58 finance and securities companies recently suspended by the Thai government, foreign creditors are losing their chai yen(cool heart) and turning to the law courts to get their money back.
Driven to despair by the antics of the Bank of Thailand, political foot-dragging and an infuriating lack of information, one seven-bank syndicate is suing through the Thai courts in the hope of recovering at least some of the ¥4 billion ($33 million) loan it extended to Thana One Finance and Securities - one of the first 16 institutions to be closed down in June.
Some foreign lenders are crying foul. They claim that negative pledge covenants were broken when the central bank's Financial Institutions Development Fund (FIDF) was allowed to use assets of the troubled firms as security against funds to bail them out without existing creditors being consulted. One report said that Bt800 billion ($20 billion) of collateral had been raised by the FIDF against Bt400 billion of loans.
The case against Thana One is being brought by a syndicate led by United Overseas Bank of Singapore. Other participants in the two-year loan signed in July 1996 are UBS, Crédit Lyonnais, Royal Bank of Scotland, Tat Lee Bank, Asian Finance Corporation and Bank of Bahrain and Kuwait. An emergency injunction against Thana One has already been thrown out, but a hearing of the case is scheduled for December 9.
"The main part of the action was to ensure the rules of international law are going to be respected," says Dominique Blanchard, head of merchant banking for Crédit Lyonnais in Singapore, which has $4.6 million of exposure to the loan.
"The FIDF took security and was beginning to take some assets to be paid back before the international lenders," he says. Although Blanchard is pragmatic about the loss, and would not be surprised if he only saw half its value repaid, he is more concerned that all creditors should be treated fairly and repayments made pari passu.
Despite the Thai courts' reputation in the past for being slow and sometimes corrupt, Blanchard is confident of a fair hearing: "They very much need the confidence of the international community and now there is a lot of pressure from the IMF and the ministry of finance, the central bank, prime minister and so on to restore confidence and I doubt that test cases like this are going to be treated unfairly."
His sentiment is echoed by a senior Bangkok lawyer, who says: "There is inefficiency and worse in the system but, by and large, the Thai judiciary is not afraid of taking on the government. The principal purpose of a lawsuit like this is to make a noise. Secretly almost every bank that has a relationship with Thailand is yelling from the sidelines for them to go for it."
"There is a lot of unhappiness with the way things are going," confirms a Singapore banker with another of the syndicate banks. "It's not just a case of the money issue, it is being kept in the dark." No-one seems to know the full extent of Thana One's assets, she adds.
Bank of America's country representative David Proctor has been rushing around in his capacity as chairman of the Foreign Banks' Association ensuring that the views of western bankers are put to the government, the central bank and the IMF, which is helping to bail out the country with a $17.2 billion rescue package.
Proctor is starting to detect a sense of frustration at the length of time it is taking for the problem to be resolved. It is now six months since the government began proceedings to suspend the first group of 16 finance companies.
By August a further 48 of the country's 91 ailing finance and securities companies were told to suspend operations pending restructuring proposals. And all the time they are suspended, the quality of their assets is deteriorating.
The newly formed Financial Restructuring Agency will oversee the future of the suspended companies, with an Asset Management Corporation taking on bad assets. "In normal situations in the west, in a work-out situation like this, creditors would have full access to financial information and would be allowed to be involved in decisions on which an accounting firm was doing due diligence," says Proctor. "They would get the benefit of the results and would be told about any potential restructuring plans. All of these elements creditors feel they have been excluded from, which just exacerbates the problem."
A particular cause for complaint is that all these companies were told to cease operations but were not allowed to give information to their creditors. Their future was to be decided by the ministry of fnance, the Bank of Thailand and a variety of committees, he says.
"Meanwhile, the central bank and the FIDF was throwing money at these companies, some of it because they needed it and some because it was cheap money on terms which were kept secret with apparently some form of security which was kept secret and is still secret," adds the Bangkok lawyer.
Finance companies were borrowing at 12% from the FIDF and lending on at 20% in some cases. Meanwhile income from ongoing operations was ordered to be paid to the Bank of Thailand which then, it is claimed, used it to repay FIDF advances.
"The intention is I think to say: 'Let's ask the judge for the money back and any transfer of assets should be declared void.'" says the lawyer, who is not directly connected with the case. "What Thana One has done, without much choice, is to pay all its cash to the Bank of Thailand and hand in security documents."
Some foreign banks also feel aggrieved that local banks appear to have received preferential treatment, although given the short maturities of local banks' loans this may not necessarily be sinister.
A distinction has also been drawn between the creditors of the original 16 institutions to be suspended and those of the later 42. The government assured creditors and depositors of the second group to be suspended that they would be taken care of, and they were given the opportunity to exchange debt for paper issued by the 60% state-owned Krung Thai Bank, though with "a substantial haircut".
