Last Wednesday, 15 March 2000), a Thai bankruptcy court declared that Thai Petrochemical Industry Plc., (TPI) was insolvent. Thai investors, while hardly jubilant, were likely to be relieved about one thing: a Thai company can no longer refuse to pay back creditors and attempt to go on with “business as usual”. Thankfully, last week’s decision may mark the end of a common but outrageous practice in Thailand, and help pave the way for further economic recovery in that country.
TPI is a sprawling petrochemicals conglomerate that in the early ’90s rapidly expanded its capacity, financing the growth largely with foreign currency debt. TPI, Southeast Asia’s largest integrated petrochemical complex, is also the company with the largest debt-burden in Thailand, with debts totaling $3.4 billion. When the Thai baht was devalued in 1997, the company quickly found itself unable to even pay interest on its debt of about US$3.5 billion, and declared a moratorium on interest payments.
TPI’s 148 creditors, which included Bangkok Bank, the U.S. Import-Export Bank, and a branch of the World Bank, wondered how they would get their $3.5 billion back. At first, they assumed that TPI would quickly and radically restructure, spin off assets, and start paying them back. Instead, TPI’s managers did very little restructuring, and were even dreaming up further expansion plans. As the years dragged on, with no interest payments forthcoming, TPI’s creditors negotiated a deal to receive an equity stake in TPI in return for delaying interest and debt repayments. But TPI’s managers refused to live up to the deal, and criticized its creditors for negotiating while TPI was “in a very weak financial position.”
Old Thai bankruptcy laws were archaic and poorly enforced, so creditors have had a difficult time recovering money from delinquent borrowers. A year ago, though about 50% of loans were estimated to have been non-performing, Thailand did not even have a separate bankruptcy court, making it difficult to have a company declared insolvent.
The Thai legal definition of insolvency relied not upon a company’s ability to make interest or debt payments, but rather upon a surplus of accounting debt over accounting assets. Thus, TPI was able to circumvent the issue by accounting for its loss-making plants as multi-billion dollar assets, worth more than its debt, asserting that under the law it was not insolvent. To make matters worse for its creditors, the Thai legal system provided little assistance for them to take control of the company in their attempt to salvage some repayment.
TPI became the symbol of Thai bankruptcies – a family owned and managed company that, while obviously bankrupt, would simply refuse to pay its banks and creditors, and hope that someday things would improve. Their creed was – “if I owe my bank $1 million, that’s my problem; if I owe my bank $1 billion, that’s their problem.” Thai Bank stocks, while recovering from their lows at the height of the Asian crisis, have performed more poorly than banks in most Asian markets. The TPI situation has been a constant reminder of Thai banks’ relatively weak position, and has helped the country ‘s bank stocks to fall as much as -35% in 2000.
It’s about time things shaped up. Wednesday’s ruling clears the way for Thai banks to salvage something from their insolvent debtors, which they sorely deserve. Further, it is expected that TPI’s old managers will be replaced with a new management team, and assets such as gas stations and fleet of tankers will be sold off.
The TPI case was, quite simply, a critical test for the credibility of Thailand’s newly strengthened bankruptcy laws, and will also hopefully serve as a lesson for managers of other insolvent Thai firms: either get serious about repaying your debt, or you’re going to lose the company.
