Managing Turnaround of the Slovenian Economy: Restructuring of Banking, Corporate and State Sectors

Prague, November 2013

prof. Marko Simoneti

marko.simoneti@pf.uni-lj.si

Content

Background on Slovenia:

- economic transition and domestic ownership,

- current financial and economic conditions

Bad bank approach to bank rehabilitation

Restructuring of the corporate sector

CG in the SOEs, Privatization and FDIs

Public sector Debt to GDP

State bailouts and financial crisis

Too important to fail (externalities!)

Do nothing, “Zombie banks” and economic activity

Act quickly and strongly !

Everything was possible, but not any more !

EU Banking union:

supervision, resolution, deposit insurance

Protecting government budgets from banking crisis !

Moral hazard in banking bailouts: who should pay ??

EU bank resolution in the future

Special regime for troubled banks (2016?)

Burden sharing: shareholders first, non-secured creditors second, taxpayers last,

Restructuring tools by authorities:

- Sale of the business on behalf of shareholders

- Set up the bridge bank (the good bank approach)

- Separation of bad assets (the bad bank approach)

- Bail-ins of unsecured creditors

Create Good bank !

Troubled bank transfers good assets and deposits on its 100% owned new Good bank

Bad assets and non-secured liabilities stay with the Old bank which has to be liquidated

Owners and non-secured creditors pay the bill

State funds (if needed at all) go to Good bank

Modern solution for leveraged banking!

Seite 11

Good bank approach

Good Bank Old bank Stara bankaAssets Labilities Assets Liabilities

Good assetsA

Debt 1

Starting capital

Good assetsA

Debt 1

Bad asssetsXY

Debt 2

Debt 3

Debt 4

1.

Capital

2.

3.

1) Transfer of good assets and secured deposits

2) State capital increase in Good bank3) Liquidation of Old bank

STATE CAPITAL INCREASE

Create Bad bank

Separate troubled assets from good assets

Recapitalize troubled banks and start new lending by the “problem free” banks

Restore market confidence in the “problem free” bank: refinancing and recapitalization

Better management of bad assets

Bad assets: NPLs, non-core assets, toxic: difficult to value or sell?

Bad bank approach (BAMC)

Bad bank Old bank

1) Transfer of bad assets with discounts 2) Write offs of capital and subordinated

debt and forced conversions of debt3) State capital increase in Old bank

Assets Laibilities Assets Liabilities

Good assetsA

Debt 1

Bad assetsXY

Debt 2

Debt 3

Debt 4

Kapital

Bad assetsXY Bonds

1.

STATE CAPITAL INCREASE

3.

2.

Current status on bank rehabilitation and sequencing of structural reforms

AQR, stress testing and assets transfer on BAMC

Big banks recapitalized, small orderly closed down

Government financing: on the market or troika?

Fiscal consolidation

Corporate sector: active management of NPLs and deleveraging as a precondition for growth

Re-nationalization of the economy, Corporate governance and privatization

Perfect storm for corporate balance sheets in the crisis

High leverage:LBOs and Financial holdings

Debt financing of speculative investments

Short term financing of long term projects

• Stop on foreign financing of banks

• Recession and export revenues down

• Collapse of the balance sheets:

real estate (-30%), capital markets (-70%)

NPLs in banks are a mirror picture of corporate debt overhang in Slovenia !!

Figure 1: Distribution of financial debt of industrial companies in Slovenia according to Debt/EBITDA in 2012 [v mio EUR], AJPES

Institutional framework for workouts

Out of court restructuring is the way to go (flexibility, speed, costs,..)

Insolvency regime is the benchmark:

- Compulsory Consolidation (CC)

- Liquidation

Main problems:

- CC abused by debtors and owners-managers

- CC complex and time consuming

- Collective action by banks

Modernizing the insolvency law (1)

Survival of the debtor vs best repayment for creditors

More powers to creditors: start and lead the process

Write-offs for shareholders if liquidation value negative

APR rule based pay-offs

Inclusion of secured creditors and adequate compensation (split of claims into secured and non-secured part)

Pooling of collateral

CC for a selected group of creditors and shareholders

Modernizing the insolvency law (2)

Automatic stay and super priority for new financing

Spin offs to Good Co. and liquidation of Bad Co.

Pre-bankruptcy procedure for large firms and financial creditors

Limited capacity of Courts: small number of creditor classes, no Court fairness hearing ??

Complexity of the rules ??

Limited capacity of insolvency administrators ??

Can bank creditors play the active role ??

No forced debt to equity conversions (Germany) ??

Collective action by bank creditors ??

New lead bank and consolidator: BAMC !!

Re-nationalization of the corporate sector

BAMC is run by foreign experts and might be partially privatized/financed on the market

Ljubljana banking club rules

AQR and new reality in valuating corporate loans

New insolvency rules

Temporary debt to equity for banks ??

Financial vs. operational restructuring by bankers ??

FDIs and political will for the structural reforms ??

THANK YOU FOR YOUR

ATTENTION.

marko.simoneti@pf.uni-lj.si