New agencies for Restructuring: Corporate Debt Restructuring Committee (CDRC), Danaharta and Danamodal

During financial crisis in year 1997-1998, Malaysian financial sector was inefficient and vulnerable. It led to instability of financial sector that reflect a bad performance in real sector and a slowed down of economic growth. Three main reasons cause instability of financial sector which are a) Most of private sector prefer to choose international capital resources to finance their investment projects. It indicates that the domestic banking sector is not a vital role in allocating resources. b) Malaysian economy was depending so much on short-term domestic dept that increase the risk in payback dept to private sector and financial sector. c) Banks are burdened with the increasing level of [1] non-performing loan (NPLs) that affect their capital adequacy (Rahimah 1999).

To stabilize the financial sector, banking sector need to restructure. Two main challenges that threat restructuring process are solving [2] NPLs problem and recapitalizing the financial institution. Thus, government introduces Pengurusan Danaharta National Berhad (Danaharta) who will take charge of NPLs problems and Danamodal National Berhad (Danamodal) who will take charge of recapitalization of banking sector. These two agencies will work together to promote financial market stability. Introducing Danaharta and Danamodal are one of the strategies towards recovery through restructuring of the banking sector (Rahimah 1999).


Danaharta

Danaharta National Berhad is government agencies. Danaharta was established to manage and liquidate the NPLs under a value-maximization approach to ensure a high return from assets. A part from that, Danaharta inject fund into manking system and help to guide restructuring programme. By that time, financial institution is able to provide credit to borrower. The main objective of danaharta is to remove the distraction of NPLs from the banking system and maximize the recovery value of the acquired assets. To remove the distraction of NPLs from the banking system, Danaharta play their role to take over NPLs from banking institution so that the problem of NPLs will not affect banking institution capital. Danaharta will not take over overall NPLs but just take over a number of NPLs that erode the banking institution capital adequacy. From that, banks able to continue their activity to provide a loan to any borrower (Rahimah 1999).

In effort to maximize the recovery value of acquired asset Danaharta will react in three ways toward recovery value of acquire asset (NPLs) (Rahimah 1999).
o For viable loans, Danaharta may recover, implement restructuring programmes and injecting additional funding to ensure the loans operate efficiently
o If the assets are unviable, it will be transferred to the [3]Asset Management Unit (AMU) for recovery using various methods
o In case the borrower unable to meet their obligations, Danaharta has the power to take over the management of the companies as a Special Administrator toward companies’ recovery.

Danaharta only buy the NPLs which valued more that RM 5 million base on market value. To purchase the NPLs, Danaharta issue government guaranteed five-year zero coupon pay back bonds and get the cash. The amount of fund that required to acquire the NPLS is RM15 billion. It is financing by RM10 billion from issuance government guarantee five-year zero coupon pay back bonds and government RM 1.5 billion and the rest come from bond and borrowing issues in domestic market (Rahimah 1999).

[4]Danaharta will implement the acquisition of NPLs in 3 phases. After completing the acquisition process, maximize the recovery value of acquired asset will be applied before NPLs is disposal (Rahimah 1999).

Phase 1

· Those group which involve the purchase of secured loans

· Those in strategic involve the purchase of secured loans

· Those group are in needs of recapitalization from Danamodal

Phase 2

· Acquisition of unsecured loan

Phase 3

· Foreign currency loans

· Financial guarantee

· Private debt securities

Danamodal

Danamodal National Berhad was established to accomplish two main objectives. These objectives are (Rahimah 1999):

· Recapitalize domestic banking institution by providing a capital resources to banks which is difficult to get a capital required.

· Help merger process among financial institution toward consolidation and rationalization.

Danamodal’s role is base on commercial and market oriented to minimize moral hazard risk toward a healthy competitive among financial institution and restore public confidence. [5]Through recapitalization, danamodal help to strengthen the capital base of banking institution. Thus, banks are able to provide intermediation service (Rahimah 1999).

Banks and financial institutions are required to merge to form a strong domestic banking institution. Banks and financial institutions are required to submit a recovery plan, thus, Danamodal together with BNM will evaluate the performance. Through that, a weaker institution is required to recapitalize via merge (Rahimah 1999).

Any financial institution which gets capital injection from Danamodal, Danamodal will have a board representation and assist restructuring process. Board representation is just a temporary status. After that particular financial institution become stable, Danamodal will take back their board representation (Rahimah 1999).

Corporate Debt Restructuring Committee (CDRC)

CDRC main duty is restructure debt between company and creditor [6]. Indirectly, they also minimized NPLs in the banking sector through restructured debt arrangement. Its role is just not only to help company in debt solution, but its role is more than that where they also involve in industry solution by studying the problem for each industry which has a problem [7]. The activity of recover corporate health will help to generate back economic and promote economic growth in the long term (Rajandram 1999).

CDRC framework is a process where the company will meet the creditor through CDRC intermediation role. To solve the problem of unviable loan, each party involved will meet and negotiate under the mediation of the CDRC. Through that, the restructure debt will formalize itself.

Note:

1. The maturity date has passed and payment in full has not been made (http://www.teachmefinance.com, 10 March 2009).

“A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full” (IMF) (http://en.wikipedia.org, 10 March 2009).

2. The NPLs ratio rose from 3.5% in march 1997 to 13.2% as at November 1998 (Rahimah Majid 1999, Restructuring The Banking Sector: Role of Danaharta and Danamodal).

3. Asset Management Unit (AMU)

4. Acquisition agreements have been signed with 14 financial institutions. About RM11.2 billion worth of gross NPLs will be acquired from 11 financial institutions (representing 22% of the total NPLs in the system). These NPLs are mainly in the strategic sector such as the broad property sector (32.5%), financing, insurance and business services (30%) and manufacturing (11.5%). The remaining is expected to be acquired before end of March 1999 (Rahimah Majid 1999, Restructuring The Banking Sector: Role of Danaharta and Danamodal).

5. About 14 financial institutions have been shortlisted for recapitalization, of which, 11 FIs have signed conditional agreement with Danamodal.

6. The CDRC's role is to help restructure large corporate debts in excess of RM50 million. (Rajandram C. (1999). Workouts and Restructuring in Malaysia. Paper presented at “Insolvency Systems in Asia: An Efficiency Perspective”, Sydney Australia.)

7. The CDRC is also undertaking wider scale industry studies to evaluate possible industry solution rather than a company solution in cases involving strategic industries like telecommunication, steel and transportation sectors. (Rajandram C. (1999). Workouts and Restructuring in Malaysia. Paper presented at “Insolvency Systems in Asia: An Efficiency Perspective”, Sydney Australia.)

References

Rahimah Majid 1999, Restructuring The Banking Sector: Role of Danaharta and Danamodal

Rajandram C. (1999). Workouts and Restructuring in Malaysia. Paper presented at “Insolvency Systems in Asia: An Efficiency Perspective”, Sydney Australia.