Thailand’s new bankruptcy court sent out an encouraging message to international lenders in March when it declared the country’s largest debt defaulter insolvent in a benchmark case that paved the way for its restructuring.
Thai Petrochemical Industry (TPI) owes $3.5 billion to lenders including Bangkok Bank, Citibank, the IFC, US Export-Import Bank and Bank of America. Led by its chief executive, Prachai Leopairatana, it argued its assets still exceeded its liabilities, and that Prachai should be allowed to remain in control of the company. In a move widely praised by creditors and analysts, the court took a wider view of insolvency, rejecting the company’s asset valuations and focusing on its inability to service its borrowings since the 1997 baht devaluation.
“It is a landmark which defines how the court will use its latitude in determining insolvency and the ruling for creditors in this case means there will now be more unilateral bankruptcy cases pushed through without the cooperation of debtors,” says Sriyan Pietersz, head of research at SG Asia Credit Securities. “It’s good news in the sense that this was a decision that investors, creditors and debtors were all watching with great concern beyond the issue of TPI,” he adds. The TPI ruling is expected to have a wider impact on the current status of company restructurings in Thailand.
Government officials had observed a slowdown in the rate of restructurings in January as debtors backed off negotiations in anticipation of the outcome of the TPI case.
The ruling in favour of the creditors is now expected to reignite negotiations with hitherto uncooperative debtors. Around Bt315 billion ($9 billion) worth of cases are currently in the process of formal out-of-court restructuring, representing about 15% of total bank non-performing loans. A significant proportion of those could now emerge from deadlock as a result of the TPI decision. “We will be looking to see more restructurings settling out-of-court as relatively healthy but recalcitrant debtors call it a day,” said Pietersz.
Initial indignation over the court’s agreement to allow Prachai to remain in charge of the company has been dismissed as of little concern in the context of his initial appointment as official planner to the restructuring by creditors. When negotiations broke down it required the approval of two-thirds of the creditors to appoint a new planner, and the court was merely following legal provisions by insisting the replacement was appointed through the correct procedure as the steering committee of creditors represented only 48% of the creditors. “Legally he cannot do anything because the official receiver will take action. He cannot move any assets,” says Baker&McKenzie partner Kitipong Urapeepatanapong.
Despite the court ruling, it could take up to another seven months, including two months to appoint the planner, before TPI is restructured, although pre-agreement of much of the work may shorten that timeframe. The key is that the company, despite its massive debts, is still considered salvageable.
Cashflows in the last quarter have been relatively healthy, buoyed by the fact that TPI is the only fully integrated petrochemicals plant in south-east Asia, enabling it the flexibility to switch between products as prices change.
TPI’s problem was that it financed its expansion with US dollar borrowings, as did much of Thailand’s industry, in the belief that the baht would remain stable. “That was their downfall,” says Pietersz.
Kitipong says: “The core decision is good for Thailand because the court did not simply look at the balance sheet.” Previously civil courts have concentrated solely on the balance sheets of troubled companies and whether liabilities outweighed assets. But Kitipong adds: “Thailand still does not have very clear provisions on what insolvency means.”
Notwithstanding the TPI case, Thailand’s codified rather than common law system means the TPI decision is not necessarily binding on future cases. Each will depend on their own facts and presentation, he added. “This case has been watched by foreign investors and banks, and if this company was not insolvent there would have been a big storm coming to Thailand.” Shares in TPI were given permission to resume trading on the Stock Exchange of Thailand once the company had Filed accounts for last year. Gill Baker
