Restructuring
in Emerging Markets
Prof. Ian Giddy
New York University
Why Financial Restructuring?
The Asian Bet
 The Solution, Part I: Recapitalization
 The Solution, Part II: Financial
Restructuring
 The Solution, Part III: Corporate
Restructuring

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 2
The Asian Bet
High growth disguised speculative
financing structures
 Governments shielded companies and
banks from capital market discipline
 Too much debt
 Too much foreign-currency debt
 Closely held ownership relying on
reinvested earnings

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 3
The Asian Bet
High growth disguised speculative
financing structures
The three
excesses
 Governments
shielded
companies and
 Too
muchmarket
debt discipline
banks from
capital
 Too
 Too much
debtmuch labor
 Too much capacity
 Too much foreign-currency debt
 Closely held ownership relying on
reinvested earnings

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 4
How the Bet was Lost
Vulnerable economies, newly liberalized,
succumbed to currency crises
 Vulnerable corporate financial structures
 Companies were unable to service even
domestic debt, never mind foreign
currency debt
 Many Asian companies resisted reform
even after the crisis, and remain
misfinanced

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Corporate Financial Restructuring 5
Today
Asia remains awash in bad debt that is
putting its banks and economies at risk
 Private estimates put the total at $2
trillion and growing
 The region's banking culture often
makes it difficult to collect.

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Corporate Financial Restructuring 6
Bad Debt: It’s Worse Than They Think
Source: McKinsey Quarterly, 2002 Number 4
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Corporate Financial Restructuring 7
Bad Old Debt
Means Little New Credit
Source: McKinsey Quarterly, 2002 Number 4
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Corporate Financial Restructuring 8
Official Restructuring:
A Spotty Record
Source: McKinsey Quarterly, 2002 Number 4
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Corporate Financial Restructuring 9
Tomorrow

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Corporations must implement the key
principles of corporate finance – estimate
realistic cost of capital and discard
investments below the WACC
Shareholders must exercise ownership rights
Banks must break the link between loan
origination and collection
Governments have to leave insolvent
borrowers to their fate
Regulators should get tough on loan
classification standards.
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 10
What is Corporate Restructuring?
Any substantial change in a company’s
financial structure, or ownership or
control, or business portfolio.
 Designed to increase the value of the
firm
Restructuring

Improve
capitalization
Copyright ©2002 Ian H. Giddy
Improve
debt composition
Change ownership
and control
Corporate Financial Restructuring 11
It’s All About Value

How can corporate and financial
restructuring create value?
Assets
Fix the
business
Copyright ©2002 Ian H. Giddy
Operating
Cash
Flows
Liabilities
Debt
Or fix the
financing
Equity
Corporate Financial Restructuring 12
Restructuring Checklist
Figure out what the business is
worth now
Use valuation model – present value
of free cash flows
Fix the business mix – divestitures
Value assets to be sold
Fix the business – strategic partner
or merger
Value the merged firm with
synergies
Fix the financing – improve D/E
structure
Revalue firm under different
leverage assumptions – lowest
WACC
Fix the kind of equity
What can be done to make the
equity more valuable to investors?
Fix the kind of debt or hybrid
financing
What mix of debt is best suited to
this business?
Fix management or control
Value the changes new control
would produce
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 13
Capital Structure: East vs West
Intel
VALUE
OFTHE
FIRM
TPI
Optimal debt ratio?
DEBT
RATIO
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Corporate Financial Restructuring 14
Fixing the Capital Structure
Too little debt
 Managers like to control
shareholders’ funds
 Underestimate the cost
of equity
Produces
 Less discipline
 Excessive cost of
capital
 Takeover risk
Copyright ©2002 Ian H. Giddy
Too much debt
 Close control of equity
 Easy money
 Underestimate business
or financial risks
Produces
 Risk of financial distress
 Excessive cost of
capital
 Destroy operating value
 Takeover risk
Corporate Financial Restructuring 15
When the Creditors are Prowling
Trouble!
Reason
The financing
is bad
Business
mix is bad
The company
is bad
Remedy
Raise equity
or
Change debt mix
Sell some businesses
or assets
to pay down debt
Change control
or management
through M&A
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Corporate Financial Restructuring 16
The Three Excesses in Thailand
Labor
 Capacity
 Debt

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 17
TPI’s Refinancing
Asia’s biggest debtor
 Almost $4 billion in foreign currency
debt financing domestic revenues
 Protracted rescheduling results in $360
million debt/equity swap
 No change in management or effective
control
 Still needs $1.2 billion new equity

Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 18
Typical Result: Debt-Equity Swaps
Cosmetic or real?
 Choices for company under siege

Raise
new equity or quasi-equity to
partially pay off creditors
Example: Iridium
Give creditors equity in place of debt
Example: Sammi Steel
Both
Example: Alphatec
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 19
What Do Debt-Equity Swaps Do?
Overleverage creates financial distress
Actual or potential default
Lenders take equity in lieu of repayment
Lenders hold equity passively
Lenders replace management
Change of control
means restructuring
Existing management buys time
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Copyright ©2002 Ian H. Giddy
Lenders sell equity
Financial engineering
Bottom line “rationalization”
Divestitures & outsourcing
Corporate Financial Restructuring 20
What Are The Alternatives?

Key: Make the new securities attractive
to:
Existing
lenders
New lenders
New bond investors
New equity investors
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 21
The Financing Spectrum
Equity
Expected Return


Residual returns
after contractual
claims
Control through
voting rights
Senior Debt


Returns independent
of the value of the
business
Control through
covenants
Risk
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Corporate Financial Restructuring 22
The Financing Spectrum
Expected Return
Equity
Preferred equity
Convertible debt
Subordinated debt
Senior unsecured debt
Senior secured debt
Risk
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 23
The Financing Spectrum
Expected Return
Equity
Preferred equity
Convertible debt
Subordinated debt
Senior unsecured debt
Asian bank NPLs
Senior secured debt
Risk
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Corporate Financial Restructuring 24
Restricted Stock: Pros and Cons
Advantages
 Overcome foreign
control restrictions
 Insiders retain
control
 If company well run,
value of control may
be low
Copyright ©2002 Ian H. Giddy
Disadvantages
 Nonvoting stock
trades at a discount
 Dual-class recaps
hurt stock price
 May allow
management to
avoid needed
reforms
Corporate Financial Restructuring 25
The Difference
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“The Ministry of Finance received a preferred
share while investors received a preferred
share and a warrant allowing them to
purchase the ministry's share at a 13.3%
premium (equivalent to the cost of carry)
during a three-year period. The preferred
shares carry a 5.25% dividend and full voting
rights”
"When institutions started buying the story,
they bought the convertible bonds, the sub
debt - you name it, they bought it."
Alternatives: Thai Farmers Bank: SLIPS,
Bankok Bank: CAPs
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Corporate Financial Restructuring 26
Transparency and Disclosure

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A 275-page prospectus, which provided a
breadth and depth of information previously
unseen in an Asian issue.
"We went and looked back at US bank
holding company offers -- those that were US
SEC Grade 3 compliant. We also went back
and looked at a lot of the prospectuses for the
recaps of US banks, like Mellon and Citibank.
We looked at the level of disclosure they
achieved and committed ourselves to
exceeding that -- which SCB did."
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 27
What Globally Mobile Investors Look At
Macro
Factors
Structural
Factors
Firm-level
Factors
Copyright ©2002 Ian H. Giddy
• Currency overvaluation
• Capital restrictions
• Acctg & disclosure requirements
• IAS compliance
• Bankruptcy regime
• Creditor rights
• Govt-corporate nexus
• Trading infrastructure
• Price-Value ratio, Sharpe ratio, EVA
• D/E ratio
• Currency & maturity mismatch
• IAS conformity
• Insider control
• Objective research coverage
• Trading liquidity
Corporate Financial Restructuring 28
Can the Form of Foreign Participation
Make a Difference? (ADRs)
Debt
Equity
Domestic
Market
Issue in Foreign Market
(Depositary Receipts)
Unsponsored Private
placement
Private
placement
IPO
Copyright ©2002 Ian H. Giddy
Exchange
traded
Global issue
or GDR
Exchange
traded IPO
Corporate Financial Restructuring 29
The New Equity Option
Key: Make the new equity attractive to:
 Portfolio investors

Domestic
International
Reduce
no!”

agency costs or we’ll “Just say
Strategic/direct investors
Domestic
International
Cede
Copyright ©2002 Ian H. Giddy
control or we’ll go elsewhere
Corporate Financial Restructuring 30
PT Astra International
?
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 31
PT Astra International
1997: Almost $2 billion USD debt
 1998: Steep losses
 Mostly IDR revenues
 1999: Debt restructuring, return to
profitability
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Copyright ©2002 Ian H. Giddy
Bina Busana Internusa: February 1999 US $1 mio
PT Astra International: June 1999 US $1,149 mio.
Fuji Technica Indonesia: September 1999 US $16 mio
Federal International Finance: December 1999 US $107 mio.
Traktor Nusantara: December 1999 US $ 21 mio.
Astra Graphia: December 1999 US $82 mio.
Corporate Financial Restructuring 32
New Equity for Astra

What investors?
 Portfolio
investors
 Financial investors
 Corporate investors

What returns should they expect?
= Risk-free rate
+ Corporate risk
+ Financial risk (leverage/debt mismatch)
+ “Agency cost” premium
+ Country risk

What restructuring?
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Corporate Financial Restructuring 33
Alphatec
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What really caused Alphatec's collapse?
What was the January 1999 rehabilitation
proposal?
What, specifically, is the "performance-linked
obligation?"
Does the January 1999 Rehabilitation Plan
meet investors’ expectations? Look at it from
the point of view of:
 Existing
creditors
 New equity investors
 A possible management buyout
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 34
Contact Info
Ian H. Giddy
NYU Stern School of Business
Tel 212-998-0426; Fax 212-995-4233
Ian.giddy@nyu.edu
http://giddy.org
Copyright ©2002 Ian H. Giddy
Corporate Financial Restructuring 38