Introduction | Rationale for Establishing the TAMC | Structure | Objectives and Powers | Policy | Mechanics | Assessment | Strategy in 2003

Since the Asian financial crisis in 1997, Thailand had suffered severe economic downturn. Financial institutions had more burdens resulting from higher reserve provisions and costs of operation. In addition, their financial performance incurred losses due to higher expenses and decreases in income gained from extending credits as financial institutions were more cautious towards lending. This thus brought about hardship and no liquidity in the corporate sector to the extent that the continuation of their normal businesses was halted. Accordingly, financial institutions’ debtors were not able to repay their loans, thereby leading large amount of these loans to become non-performing loans (NPLs). As a result, the establishment of National Asset Management Corporation or the Central Asset Management Organization with the objectives to resolve the NPL problem in financial institutions and to help viable debtors to be able to continue their business operations was one of the immediate policies of the Government of Prime Minister Thaksin Shinawatra.

Declared as Thailand’s last chance to clean up its non-performing loans (NPL) mess, the Emergency Decree on Thai Asset Management Corporation, or TAMC Decree, came into force on June 9, 2001. Full of good intention but crippled with hastily drafted and obscure provisions, the TAMC Act has been riddled with criticism and even a legal suit on its constitutionality. Finally clearing its constitutional hurdles in October 2001, the TAMC started accepting its first lot of asset transfers last October 15, 2001. Essentially, what is the TAMC and what is it empowered under the Act?

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Rationale for Establishing the TAMC

The rationale for establishing a national asset management corporation was to allow the government to address the high level of NPLs in both state-controlled and private financial institutions and to set the environment right for banks to recommence lending.

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Structure

The TAMC is a government agency fully owned by the Financial Institutions Development Fund (FIDF). The TAMC will issue Baht 170 billion (approximately US$3.7 billion) worth of 10- year notes guaranteed by the FIDF to financial institutions as payment for TAMC’s purchase of NPL assets from these financial institutions. The TAMC is managed by a Board of Directors consisting of 11 members appointed by the Minister of Finance and approved by the Council of Ministers.

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Objectives and Powers

Basically, The TAMC has the objectives in managing impaired assets of financial institutions and of asset management companies, debt restructuring, and business reorganization by taking transfer of sub-quality assets or distressed assets* (“NPLs”) of financial institutions and of asset management companies as well as any other rights over the property being held as collateral for debt repayments with respect to such impaired assets, or by applying any other measures for the purpose of reviving the economy or restoring national stability.

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Policy

• Maximize recoveries of all assets.

• Diminish State and Taxpayers’ loss.

• Restructure debtors’ business to be able to operate.

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Mechanics

1. Transfer of Assets

   1. NPLs that can be transferred

      All state-owned financial institutions and asset management companies are required to transfer all NPLs falling under the following categories as at December 31, 2000:

      • “loss” (required to be written off)

      • “doubtful of loss” (requiring 100% provisioning)

      • “doubtful” (requiring 50% provisioning)

      • “sub-standard” (requiring 20% provisioning)

      Private financial institutions and asset management companies may transfer NPLs to the TAMC only under the following circumstances:

      • The NPLs are secured by property.

      • The debtor (which must be a juristic entity) is indebted to at least two Thai financial institutions.

      • The total value of NPLs owed by a debtor is at least Baht 5 million.

      • No restructuring agreement in writing has been entered for the NPL by July 9, 2001, and the NPL is not part of a rehabilitation plan approved by the Bankruptcy Court before June 9, 2001. Trade creditors and non-Thai banks and their branches are not eligible to transfer their NPLs to the TAMC.

   2. Pricing

      The price of the assets payable by the TAMC to state banks is the value of the collateral excluding personal guarantees. The rules prescribed by the TAMC Board shall determine the price to be paid if there is no collateral. The price payable to private banks that opt to transfer NPLs to the TAMC is the value of the collateral (excluding personal guarantees) or the book value of NPL less applicable reserve amount, whichever is lesser. Book value here means the total principal amount of the loan as at the date of transfer together with accrued interest for the three-month period prior to the transfer date. If the collateral is land, its value is the assessment price used by the Land Department in the calculation of land transfer fees.

   3. Profit and Loss Sharing

      Profit and loss will be shared as follows:

      Profit

      • First 20% will be shared equally between the TAMC and the financial institution.
      • Additional profit not exceeding the difference between the book value and transfer price will accrue to the financial institution.
      • Any further profit will accrue to the TAMC.

      Loss

      • First 20% of transfer price will be absorbed solely by the financial institution.
      • Second 20% will be shared equally by the TAMC and the financial institution.
      • Remaining loss will be absorbed by the TAMC.

2. Debt Restructuring

   One of the most interesting powers of the TAMC is its ability to restructure the debt by unilaterally amending loan terms, forcing a debt-equity conversion (despite the absence of a similar mechanism under present laws), taking assignments of debts or assets from the debtor to settle debts, and taking transfer of shares or buying issued shares to increase the debtor’s capital. For all these and other measures, only the approval of the TAMC Board is required. Certain procedures required under relevant laws are generally waived.

3. Business Reorganization

   The TAMC Decree sets forth the rules and procedures of business reorganization separate from those provided under the Bankruptcy Act. The criteria for business reorganization under the TAMC Decree are as follows:

   • The debtor must be a limited company, a public limited company, or a registered partnership.

   • The TAMC is a creditor and is owed more than 50% of the debtor’s total debt. There is evidence that the business can be carried on and its rehabilitation will benefit the national economy.

   • The debtor consents and agrees to be bound by the terms and conditions of business reorganization under the TAMC Decree.

   The TAMC Executive Committee appoints the planner who is tasked to draft the plan within the time limit set by the TAMC. Once the Executive Committee and the TAMC Board approve the plan, the TAMC then files a petition with the Bankruptcy Court for it to consider the plan. From the date of court approval of the plan to the completion of business reorganization, the automatic stay similar to that under the Bankruptcy Act is applied. The plan may require a merger of debtor’s businesses, closure of part of the business, payment of other creditors participating in the business reorganization, and other measures approved by TAMC Board. In these circumstances, certain provisions under the Civil and Commercial Code (CCC) and the Public Company Limited Act are waived.

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Assessment

It has recently been reported in the press that as of the end of December 2003, the TAMC had already restructured debts of more than 732 billion baht. These completed cases account for 97% of the TAMC’s non-performing assets (NPA). The NPA which had already restructured divided into 2 categories. Firstly, the assets had restructured or recovered in the central bankruptcy court. These cases account for 59% of the book value. The second part, the collateral had been forced sell by the management committee. The Expected Recovery Rate of all assets is 47% of the book value, calculated by using discount rate at MLR (at 5.7%).

Follow the restructuring plan by the central court, TAMC’s cash flow continued to increase from the 2002’s estimation at 5 billion baht to over 25 billion baht by the end of 2003.

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Strategy in 2003

1. The Restructured of the listed company

   The TAMC had already restructured of the listed companies’ NPA, roughly 49 billion baht. Two listed company still on the process of making due diligence and adding some information from the financial consultant, estimate to settle within the first quarter of 2004.

2. New credit loan from the commercial bank

   TAMC intend the restructured company to get additional loan which they can invest in the permanent asset or cash flow in hand. By consider giving new creditor a privilege through obtainment of higher collateral value which is priced in tandem with collateral assessment value, issuance of new loan, allowance for new creditor to receive debt repayment in the form of cash from borrower in accordance to new debt collateral, and also borrower that is in breach of contract and is undergoing collateral enforcements. As for new loan that is classified as for the cash flow purpose and do not sign agreement with the TAMC, TAMC allow new creditor to receive full amount of debt repayment from collateral enforcements prior to TAMC.

3. TAMC on tour

4. Redemption ahead of maturity

5. Operational and communicational systems for management

6. Corporate Governance

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