1 corporate adjustment and restructuring in thailand by dr. yunyong thaicharoen prapan kiatikomol
TRANSCRIPT
1
Corporate Adjustment and Restructuring in Thailand
by
Dr. Yunyong Thaicharoen
Prapan Kiatikomol
2
Contents
1.Introduction
2.Corporate Adjustment and Performance
- Role of Monetary Policy
3.Links between Firm Balance Sheet Condition and Investment: Panel Regression Analysis
4.Conclusions and Policy Recommendations
4
Weak FIs
Highpublic debt
Weakness in Corporate sector played a central role in the Weakness in Corporate sector played a central role in the Balance Sheet CrisisBalance Sheet Crisis (e.g. Paul Krugman (1999)) (e.g. Paul Krugman (1999))
Output Crisis
Leveragedcorporate
sector
Deteriorated
confidence
Lack of Credit Flows
Investment Collapse
FIDF
BahtDepreciation NPL
Low TaxRevenue
5
Cross country evidence shows link between
initial high leverage ratio and subsequent output loss
Source: Strong (2000), Claessens et al. (1998)
-
-
-
-
-
. . . . . . .
Corporate Debt/Equity Ratio,
Rea
l GD
P g
row
th, d
evia
tio
n
fro
m t
ren
d,
Taiwan
Philippines
Singapore
Hong Kong
ThailandMalaysia
Indonesia
Korea
6While GDP has returned to the pre-crisis level in 2002, ….
Real GDP* for Crisis-Hit Countries
60
70
80
90
100
110
120
130
Q1:93 Q1:94 Q1:95 Q1:96 Q1:97 Q1:98 Q1:99 Q1:00 Q1:01 Q1:02
Index
Thailand Indonesia Philippines
Malaysia Korea
* Real GDP (Seasonally adjusted)
1997q2 = 100
Source: CEIC
7
Investment recovery has been slow, reaching only 57
percent of the pre-crisis level, and lagging behind other
countries. Investment Level for Crisis-Hit Countries
40
50
60
70
80
90
100
110
120
130
Q1:93 Q1:94 Q1:95 Q1:96 Q1:97 Q1:98 Q1:99 Q1:00 Q1:01 Q1:02
Index
ThailandIndonesiaPhilippinesMalaysiaKorea
1997q2 = 100
* Real Investment (Seasonally adjusted)Source: CEIC
9
Data Issues
Source: ISIMS database form SET
Period: Quarterly data from 1994-2001
Type of data: Firm level data - 371 Non-financial Public listed Companies - Balance Sheet and Income Statement
10
Financial Ratios
Debt to Equity Ratio = Total Liabilities / Shareholders’ Equity
Return on Average Assets (ROAA) = (Net Income / Average Total Assets) *100
Average Asset Turnover = (Sales / Average Total Assets)*100
Net Profit Margin = (Net Income / Sales) *100
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
Interest Coverage Ratio (ICR) = Earning before Interest and Tax (EBIT) / Interest Expense
11
Private Credit Growth
0
5
10
15
20
25
30
1993 1994 1995 1996
%
External Debt*
0
20
40
60
1993 1994 1995 1996
Bn
US
$.
Source: Bank of Thailand
Private Investment*
0
2
4
6
8
10
12
1993 1994 1995 1996
%
30
31
32
33
34
%
Growth (LHS)
% of GDP (RHS)
Source: NESDB
* Private (non-bank)
External borrowing induced by:- Domestic Interest Rate >
Foreign’ s- Fixed Exchange Rate
Pre-crisis: During 1993-1996, GDP grew around 8 percent per annum, driven by high investment financed mostly by bank debt.
Source: Bank of Thailand
* At 1988 price
12Led to …
Liabilities and Equity
0
500
1000
1500
2000
2500
3000
1993 1994 1995 1996
Bn
Bt
Equity
Lt lia
Cur lia
Source: SET data and authors estimate
Total Asset rose quickly• High ratio of current liabilities to
Total liabilities• Liabilities grew faster than
Equity
D/E rose to almost 2 in 1996
Debt to Equity Ratio
0
0.5
1
1.5
2
1993 1994 1995 1996
X
13Liquidity and profitability had deteriorated well before the crisis, leaving firms’ balance sheet position in vulnerable conditions.Return on Average Assets (ROAA)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
94q1 94q3 95q1 95q3 96q1 96q3
%
Mean
Median
Source: SET data and authors estimate
Average Assets Turnover
12
14
16
18
20
94q1 94q3 95q1 95q3 96q1 96q3
%
Mean
Median
Quick and Interest Coverage Raitos
0.6
0.7
0.8
0.9
1
94q1 94q3 95q1 95q3 96q1 96q3
X
1
2
3
4
5
6
7
X
ICR (RHS)
Quick (LHS)
14
The Effect on the Corporate Sector
1. Balance Sheet Effect
2. Collapse of Domestic Demand
Increasing
Interest Expense
Contraction of Sales and Profit
Lower
Equity
Closing Down
Restructuring
Rising Debts
15Crisis and beyond: Debt to Equity Ratio increased considerably in 1997. Since then it fell slowly, and speeded up in 2001.Debt to Equity Ratio
0
1
2
3
4
5
6
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1
X
24
29
34
39
44
49
Bt/
US
$
Mean
Bt/US$
Median
Source: SET data and authors estimate
16The corporate sector has been continuously reducing its debt burden and shifting to more long term maturity debt.
Liabilities and Equity
0
500
1000
1500
2000
2500
3000
3500
1993 1994 1995 1996 1997 1998 1999 2000 2001
Bn
Bt
Equity
Lt lia
Cur lia
Source: SET data and authors estimate
17Liquidity was worsened during the crisis…
Quick Ratio
0.2
0.4
0.6
0.8
1
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1
X
Mean
Median
Source: SET data and authors estimate
Interest Coverage Ratio (ICR)
-2
-1
0
1
2
3
4
5
6
7
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1
X
Mean
Median
Quick Ratio declined rising current liabilities,
but has now improved thank to • winding down liabilities • gradual recovery of demand.
ICR fell because of • Increased costs esp. interest
expense• Falling domestic demand,
but has been improving, though still susceptible to economic uncertainty.
18Profitability reached the lowest in 97q4 due to…
Return on Average Assets (ROAA)
-15
-10
-5
0
5
10
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1%
Mean
Median
Source: SET data and authors estimate
Average Assets Turnover
10
12
14
16
18
20
22
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1
%
Mean
Median
Net Profit Margin
-120
-100
-80
-60
-40
-20
0
20
40
60
94q1 95q1 96q1 97q1 98q1 99q1 00q1 01q1 02q1
%
Mean
Median
• High interest expense and depreciation
• Weak domestic demand
ROAA improved thereafter owing to
• better economic condition, • but still volatile & vulnerable.
19
Debt to Equity Ratio
0
0.02
0.04
0.06
0.08
0.1
0.12
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2 0 2 4 7 9 11 13 15 17 20 22 24 26 28 30
D/E (X)
De
ns
ity
1995
Source: SET data and authors estimate
Debt to Equity Ratio: Mode was around 1.2 in 1995, then…
20
Debt to Equity Ratio
0
0.02
0.04
0.06
0.08
0.1
0.12
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2 0 2 4 7 9 11 13 15 17 20 22 24 26 28 30
D/E (X)
De
ns
ity
1997
1995
Source: SET data and authors estimate
…rose to 2.3 in 1997, while more distribution shifted to more extreme values. (fat tails)
21Subsequently, in 2001, the mode declined to 1995’s level, but still had fatter tails.
Debt to Equity Ratio
0
0.02
0.04
0.06
0.08
0.1
0.12
-22 -19 -17 -15 -13 -11 -9 -6 -4 -2 0 2 4 7 9 11 13 15 17 20 22 24 26 28 30
D/E (X)
De
ns
ity
2001
1997
1995
Source: SET data and authors estimate
22
Return of Average Assets (ROAA)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
-91 -83 -75 -66 -58 -50 -41 -33 -25 -16 -8 0 9 17 25 34 42
ROAA (%)
Den
sity
1995
Source: SET data and authors estimate
ROAA was quite low before the crisis then deteriorated dramatically in 1997. It improved gradually along with the economy , but is still fragile.
23
Return of Average Assets (ROAA)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
-91 -83 -75 -66 -58 -50 -41 -33 -25 -16 -8 0 9 17 25 34 42
ROAA (%)
Den
sity
1997
1995
Source: SET data and authors estimate
ROAA was quite low before the crisis then deteriorated dramatically in 1997. It improved gradually along with the economy , but is still fragile.
24
Return of Average Assets (ROAA)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
-91 -83 -75 -66 -58 -50 -41 -33 -25 -16 -8 0 9 17 25 34 42
ROAA (%)
Den
sity
2001
1997
1995
Source: SET data and authors estimate
ROAA was quite low before the crisis then deteriorated dramatically in 1997. It improved gradually along with the economy , but is still fragile.
25ICR deteriorated in 1997, then improved thereafter. However, as of 2001, many firms remain relatively illiquid, even compared with 1995’s.
Interest Coverage Ratio (ICR)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
-15 -12 -8 -5 -1 2 6 9 12 16 19 23 26 30 33 37 40
ICR (X)
De
ns
ity
2001
1997
1995
Source: SET data and authors estimate
26Uneven effects of the crisis and subsequent recovery across sectors….
Debt to Equity Ratio
0
2
4
6
8
10
12
1994 1995 1996 1997 1998 1999 2000 2001
X
Trade
Ntrd
Source: SET data and authors estimate
• Non-Tradable was more adversely affected by the crisis.
• Tradable Sector recovered more quickly than Non-Tradable.
Return on Average Assets
-25
-20
-15
-10
-5
0
5
10
1994 1995 1996 1997 1998 1999 2000 2001
%
Trade
Ntrd
Interest Coverage Ratio
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1994 1995 1996 1997 1998 1999 2000 2001
X
Trade
Ntrd
27
Altman's Z-Score
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2536 2538 2540 2542 2544
zsc_median_all zsc_median_no_rehab&delisted
Though improving, many Thai firms remain vulnerable to
financial distress by Industry’s standard measure.
Source: SET data and authors estimate
Z > 2.99 Safe Zone1.8 < Z < 2.99
Gray ZoneZ < 1.8 Distress Zone
Sales / Assets 0.999
Weight
ROA 3.3
Equity / Debt 0.6
Working Cap / Assets 1.2
Retained Earning 1.4
Ratios
28Role of Monetary Policy: Sensitivity Analysis
Objective: Study the effect of Monetary Policy on the firm’s balance sheet
Methodology: Sensitivity Analysis of 1st round effect of a reduction in the policy rate by 1 percent.
Main Assumption
RP 14 day
Lending Rate
Deposit Rate
Exchange ratedepreciates
Macro Model
29
Other Assumptions
Deposit Rate
6 Months Time Deposit
Proportion of Distressed Assets to Total Loan
Proportion of Floating Rate Loans
Proportion of Domestic Floating Rate Bonds
Foreign Currency Denominated Debt
30Role of Monetary Policy: Cont.
Results : 1st round effect of a cut in the policy rate
Interest receipt = -1,732 Mn Bt (- 46.7%)
RP 14 day 1%
Interest expense = -8,434 Mn Bt (- 8.0%)
ROA from 0.7 1.0
Interest Cover = 7.1%
The accommodative stance of monetary policy has helped facilitate firm’s financial restructuring by providing liquidity and boosting profitability at least in the short run.
Net Interest= -6,702 Mn Bt
32
0
10
20
30
40
50
Philippines Malaysia Indonesia Thailand Korea
0
10
20
30
40
50199820002001
Share of Listed Firms with Interest Coverage Ratio of Less Than One, 1998 vs. 2000
(%)(%)
Overall liquidity position improved, but a significant number of Thai firms remains relatively illiquid …
Source: Asian Economic Monitor (2001), ADB
33
0
10
20
30
40
50
60
Philippines Malaysia Indonesia Thailand Korea
0
10
20
30
40
50
60
199720002001
Percentage of Companies with Negative Returns, 1997 vs. 2000
(%) (%)
Similarly, with the pick up in the economy, more firms registered profits, but many continued to pile up losses.
Source: Asian Economic Monitor (2001), ADB
34
Debt/Equity Ratios, 1997 vs. 2001(in percent)
0
100
200
300
400
500
600
700
Philippines Malaysia Indonesia Thailand Korea
0
100
200
300
400
500
600
700
199720002001
(%)(%)
Leverage ratio improved significantly, but still remains relatively high, signaling further restructuring needed.
Source: Author’s calculations for Thailand; Asian Economic Monitor (2001), ADB for the rest.
35
Finance and Investment
• Traditional Models of Investment: Little role of financial factors - Tobin’s q: Market value of assets / replacement cost of assets. - M&M: Assume perfect market
Investing and financing are independent.
• Market Failure: Asymmetric information and Agency Cost - Asymmetric information: inability to differentiate good
and bad firms - Agency Cost: potential conflict between owner, manager and debt holders
•
36
Implications:
Higher costs of external fund relative to internal fund
Firms’ financial structure influences investment
Shocks to firm’s balance sheet / collateral value will alter dynamics of investment (Bernanke & Gertler (1989))
These problems should intensify during economic downturn.
37
15
1
14
1
13
1
1211
1 it
it
it
it
it
it
it
itit
it
it
K
S
K
D
K
LA
K
Cq
K
I
where: I = investment, K = capital stock, q = Tobin’s ‘q’, C = cash flows, L = stock of liquid financial assets, D = stock of outstanding debt, and S = sales
The estimating equation
Empirical Methodology:Panel data regression using fixed effects methodology
for 187 listed non-rehab firms with non-missing data between 1994-2001
38
Aggregated Results Dependent Variable: Net Investment Rate (t)
Explanatory Variables
All Period (95-01)
(1)
All Period (95-01)
(2)
Pre-Crisis (95-96)
(3)
Crisis (97-98)
(4)
Post-Crisis (99-01)
(5)
Tobin’s q (t-1)
0.083***
(0.010)
0.07*** (0.011)
0.166***
(0.031)
0.072* (0.037)
0.108***
(0.025)
Cash Flow (t-1)
-0.024 (0.058)
-0.03 (0.058)
0.530 (0.395)
-0.105 (0.168)
0.001 (0.053)
Liquid Assets
(t-1) 0.219***
(0.065) 0.201***
(0.066) 0.47** (0.191)
0.402** (0.18)
0.364*** (0.137)
Debt (t-1)
-0.195*** (0.032)
-0.178*** (0.033)
-0.014 (0.189)
-0.363*** (0.090)
-0.121*** (0.042)
Sales
(t) 0.131***
(0.017) 0.134***
(0.017) 0.391***
(0.058) 0.187***
(0.064) 0.104***
(0.025)
Cap. Util. (t)
0.0014** (0.0006)
(*,**,*** denotes 10, 5, and 1 percent significant level, respectively)
39Disaggregated ResultsGroup by Leverage Ratio
• Higher leverage firms are more sensitive to both debt and liquid assets than lower leveraged firms.
Group by Size• Smaller firms are more sensitive to liquid assets than larger firms, while debt is significant only for larger firms.
Group by Retention Rate• Higher retention firms are more sensitive to liquid assets and debt than lower retention firms.
Overall Results generally support the view that financial factors influence investment and the impacts are varied by firm’s characteristics.
40
Extensions to other firms
• Within SET: Rehab firms vs. non-rehab firms• Outside SET: firms tend to be smaller, less transparent, inferior quality of data and more bank dependence.
Implications on Monetary Policy
• Evidence of “balance sheet” credit channel of monetary transmission mechanism• Impacts of monetary policy are uneven across firm groups.• Though many factors influence investment, financial factors matter and deleveraging efforts should receive priority.
42
Policy Recommendations
1. Accelerate high quality debt restructuring
2. Improve corporate governance
3. Speed up capital market development for alternative funding sources
4. Enhancing corporate operational efficiency by improving the competition framework as well as encouraging a more active M&A markets
43
Strengthen banking system
CG & Structural Reforms
Strategy for Investment RecoveryStrategy for Investment Recovery
Recovery
Deleverage corporate sector
Improve confidence
Renewed Credit Flows
New Investment
Enhance Efficiency
44
“In the end, the public determines the desirable sequencing of policy change. A decision to realize the efficient reallocation of resources all at once will be associated with significant pain but at the same time, it could pave a way for faster recovery later. To the contrary, a decision to realize reallocation in a gradual manner could avoid a sharp downturn, but it could delay a sustainable recovery.
It is hard to say which approach is appropriate a priori. Having said that…the fact that the economy has recorded a low growth for 10 years or so, the shortcomings of the gradual approach are becoming more evident.”
Yutaka Yamaguchi, Deputy Governor of the Bank of Japan