ASSET MANAGEMENT COMPANIES AND NON-PERFORMING ASSETS The Asian Experience

Transcription

1 ASSET MANAGEMENT COMPANIES AND NON-PERFORMING ASSETS The Asian Experience Presentation for the Third International Non-Performing Assets Forum Elena Miteva, Administrator, OECD This presentation draws on on papers discussed at at the OECD Forum for Asian Insolvency Reform and in in particular on on work by by Robert Zafft, Senior Corporate Governance Specialist, OECD and Lampros Vassiliou, Senior OECD Consultant. However, any mistakes and inconsistencies are to to be be attributed solely to to the author. Moscow, June

2 2 To achieve long-term stability and growth, Asia needs to focus on the fundamentals of insolvency and creditor rights systems 1. In the aftermath of the crisis, emergency measures were taken to stabilise the economy and the financial sector 2. Post-crisis measures averted financial system meltdown, but did not successfully address the underlying behaviours and structural weaknesses 3. By mastering the fundamentals, Asian economies can address these behaviours and problems and achieve stability and growth

3 3 Asset Management Companies formed a crucial part of emergency measures to address the 1997 crisis Creation of legal framework for investment in distressed assets and bulk sales of non-performing loans (NPLs) Establishment of limited-life, specialised asset management companies (AMCs) Introduction of new rescue procedures to insolvency regimes Formal restructuring (often modeled on US Chapter XI); and Development of informal workout practices Informal restructuring (London approach).

4 4 AMCs tactical goal was to restructure NPLs and contribute to the broader strategic aims of financial and macroeconomic stability Tactical To improve the quality of distressed assets To preserve the value of the debtor s business as a going concern if The business is viable; and Return to creditors can be maximized Strategic And more broadly, to prevent bank failures, stabilise the financial system and recover economic activity and growth

5 5 AMCs and similar specialised agencies proliferated throughout the region Voluntary corporate workout Asset management company Agency for bank recapitalisation Indonesia Jakarta Initiatve Indonesian Bank Restructuring Agency (IBRA) Korea Corporate Restructuring Coordination Committee (CRCC) Korea Asset Management Corporation (KAMCO) Indonesian Bank Restructuring Authority Korea Deposit Insurance Corporation Malaysia Corporate Debt Restructuring Committee (CDRC) Danaharta Danamodal Thailand Corporate Debt Restructuring Advisory Committee Financial Sector Restructuring Authority (FRA), Asset Management Corporation (for nonbank financial companies Financial Restrucuting Advisory Committee

6 6 Examples Improved bankruptcy proceedings and promoted new rescue legislation Korea s KAMCO is considered among the region s success stories Implemented workouts and corporate restructuring through debt-equity swaps and lending working capital Promoted foreign participation and ownership in real estate and corporate restructuring Put into practice new financial expertise: Worldwide marketing for distressed Korean assets; Asset valuation technologies, Structuring of financial transactions; New financial instruments, such as mortgage and asset-backed securities, collateralised debt obligations

7 Examples (cont d) Co-ordinated sales across a range of selling institutions Thailand FRA For the first time in Asia, AMCs and rapid disposition agencies, like FRA, have developed a culture for bulk sales Focused on 58 suspended finance companies Used various packaging approaches Sales were reported as the largest one day sales in history Implemented (with varying degrees of success) techniques aiming to increase prices Effective mechanism to dispose of foreclosed assets FRA experience prompted the adoption of new procedures by the MoJ Legal Execution Department 7

8 8 Asian AMCs, by and large, achieved their strategic goals Respected country specific challenges Dealt with legal, institutional and structural shortcomings Served as vehicle for reforms and financial innovation Supported the involvement of the private sector

9 2. Post-crisis measures averted financial system meltdown, but did not successfully address underlying behaviours and structural weaknesses 9

10 10 In implementing emergency measures and pursuing strategic goals, AMCs faced serious constraints and made choices Tactical compromises Banks recapitalised but but not not reformed Little restructuring of of the the debtors owning the the transferred NPLs Institutional limitations of AMCs Run Run by by governments and and potentially subject to to interference Still Still building expertise Insufficient disciplines // incentives imposed on on banks Moral hazard Limited period of of operation

11 11 At some point, failure to address these tactical, but critical issues can lead to another crisis Private estimates now place total NPLs in in Asia at at US$ 2 trillion, or or nearly 30 % of of the region s annual GDP. There might not be enough fiscal and monetary liquidity for governments to to recapitalise the financial system

12 3. There is a clear need to master fundamentals so crisis does not recur 12

13 13 To deal meaningfully with bad debt, AMCs need to master the basics Governance Independent oversight board with clear mandate Defined and transparent procedures Improved reporting standards Greater focus on restructuring Greater powers and institutional capabilities The quality and speed of asset resolution is key Taking ownership of NPLs and proactive managemen Working with debtors to improve cash-flow of assets underlying NPLs For example, power to separate bad management from the debtor and to liquidate debtors, which cannot be expeditiously restructured Training, knowledge transfer leadership

14 14 To deal meaningfully with bad debt, AMCs need to master the basics (cont d) Incentives and disciplines for banks Enhanced accountability of banks and bank managers Ensure banks put in place risk-analysis and credit management systems Ultimate burden no longer transferable to AMCs Greater protection of creditor rights Credible liquidation procedures and efficient secured transaction processes Triggers and incentives for insolvency AND Strong and credible regulators, free from political pressure

15 15 The state must actively involve itself Providing sound legal and regulatory framework Where necessary, providing resources Governance, accountability and transparency Ensuring a role for the private sector Political will is key

16 ANNEX 16

17 17 OECD and Insolvency The OECD is active in insolvency reform in Asia and Central / Eastern Europe since OECD, in co-operation with APEC, AusAID and the government of Japan, established a Forum for Asian Insolvency Reform (FAIR) as a sustained policy dialogue platform for discussion and exchange of experience on insolvency reform. The OECD participates in the World Bank Insolvency Initiative, aiming to identify principles and guidelines for sound insolvency systems.

18 18 The OECD Forum for Asian Insolvency Reform The FAIR was born of the Asian financial crisis. Private estimates now place total NPLs in Asia at US$ 2 trillion, or nearly 30 % of the region s annual GDP. In recognition of the challenges stemming from the enormous level of bad debt, FAIR shared goal is to take sound policy and to ground it in the situation and circumstances of each country of the region.

19 19 The OECD Forum for Asian Insolvency Reform (cont d) The First FAIR (Bali, 2000) focused on recent developments and the role of the judiciary The Second FAIR (Bangkok, 2002) discussed informal workouts and insolvency reforms in Thailand The Third FAIR (Seoul, November 2003) will examine the approaches to maximising value from distressed assets and NPLs

20 Founded in 1961 as a follow on to the Marshall Plan, the Organisation for Economic Co-operation and Development promotes international codes, guidelines and principles by which countries can make their economic systems compatible. OECD Member Countries and Co-operating Countries Co-operation programmes (49) Co-operation programmes and participation in OECD bodies*(16) OECD Members (31) * Non-Members not participating in OECD bodies take part in OECD meetings and activities upon ad hoc invitations. 20

21 21 For More Information on FAIR