Economics  of  the  Slovenian  Corporate  

Debt  Crisis    

Conference  “Debt  Restructuring  and  Insolvency”    February  5-­‐6,  2014  

 

 Jože  P.  Damijan  

University  of  Ljubljana,  Faculty  of  Economics    

Outline  

•  Extent  of  the  corporate  debt  overhang  •  Breakdown  by  industry  &  firms  

•  Why  financial  soundness  is  important  •  Some  empirical  results  

•  What  restructuring  framework  is  needed?  •  Debt  restructuring  &  insolvency  framework  •  Foreign  senior  capital  &  private  capital  investment  

•  Foreign  experience  from  major  financial  crises  

2

Corporate  debt  overhang  

•  Excessive  corporate  debt  aFer  the  2008  financial  crisis    •  A  mirror  picture  of  the  banks’  troubled  balance  sheets  

•  Dragging  down  firms  facing  debt  overhang  because  default  is  likely  •  Banks  reluctant  to  lend,  equity  holders  reluctant  to  invest  

•  ProblemaNc  also  for  solvent  firms  (Ass.  >  Liab.)  •  Banks  burdened  with  troubled  assets  contribute  to  overall  financial  distress  

3

Net  debt  and  number  of  firms    (2010-­‐2012;  bn.  €)  

•  Net  debt  ≈  70%  of  GDP  •  Increasing  number  of  firms  with  net  debt  

•  Net  debt  =              Debt  –  (cash  +  liq.ass.)  

25,079' 25,012' 24,667'

22,117'

22,453'

23,195'

70.7%' 69.2%' 69.8%'

0.0%$

10.0%$

20.0%$

30.0%$

40.0%$

50.0%$

60.0%$

70.0%$

80.0%$

20,500$

21,000$

21,500$

22,000$

22,500$

23,000$

23,500$

24,000$

24,500$

25,000$

25,500$

2010$ 2011$ 2012$

net'debt/GDP'(%)'ne

t'deb

t'(bn

'eur)'

Net$debt$ No.$Firms$ Net$debt/GDP$

Magnitude  of  financial  leverage  (2012)  

•  Leverage  =  Net  debt    –  EBITDA  

542$1,460$ 1,520$ 1,620$ 1,770$

3,140$ 3,210$

11,400$

4,459$

3,080$

2,280$

1,726$1,447$

2,079$ 1,995$

6,129$

0$

1,000$

2,000$

3,000$

4,000$

5,000$

6,000$

7,000$

8,000$

0$-$1$ 1$-$2$ 2$-$3$ 3$-$4$ 4$-$5$ 5$-$7$ 7$-$10$ >$10$0$

2,000$

4,000$

6,000$

8,000$

10,000$

12,000$

14,000$

numbe

r$of$fi

rms$

net$debt/EBITDA$raCo$

net$debt$(mn.$eur)$

Net$debt$

No.$Firms$

50$%$firms$21$%$debt$

25$%$firms$33$%$debt!

25$%$firms$46$%$debt!

Magnitude  of  debt  overhang  (2012)  

•  Total  debt  overhang:  range  of  9.6  to  13.1  bn.  €  (intermediate:  11.5  bn.  €  )  •  Firms  with  excessive  debt:  10,100  to  13,200  (intermediate:  11,600)  

0"

168"

998"

1,640"

8,720"

218"

464"

1,510"

1,990"

8,870"

3"

53"

513"

1,290"

7,730"

0" 1,000"

2,000"

3,000"

4,000"

5,000"

6,000"

7,000"

8,000"

9,000"

3"-"4"

4"-"5"

5"-"7"

7"-"10"

>"10"

Debt"overhang"(r=4)"

Debt"overhang"(Ra>ng"Ba)"

Debt"overhang"(Ra>ng"B)"

25"%"firms"68"%"to"81"%"debt""

overhang"

 •  Debt  overhang  =                      Net  debt  –  r*EBITDA  •  Leverage  r:                  Moody’s  Ba  ≈  3.3                Moody’s  B      ≈  5                Intermediate:  4      

Debt  overhang  by  sectors  

Total:  •  Top  6  sectors:                9.9  bln.  €    •  Rest:                1.6  bln.  €      When  controlling  for  5  state-­‐owned  firms:  •  Total  debt  overhang  reduces  by:  

             1.6  bln.  €      

2,284%2,216%

1,573% 1,553%

1,226%

1,035%

486% 455%

154% 120% 110% 95% 73% 57%183$

1,150$

240$

0$

500$

1,000$

1,500$

2,000$

2,500$

Wholesale$and$retail$trade$

Transporta8o

n$and$storage$

Real$estate$$

Manufacturin

g$Profess.,$scient.$and$technical$act.$

Construc8o

n$Ho

tels$and$restaurants$

Electricity,$gas$

Inform

a8on$and$co

mmunica

8on$

Administ.$and$su

pport$services$

Human$health

$and$so

cial$w

ork$act.$

Arts,$entertain.$and$recrea8o

n$Agriculture,$forestry$and$fishing$

Water$su

pply;$sew

erage,$waste$$

Debt$overhang$

Debt$overhang$w/out$state$

Source:%AJPES;%own%calcula;ons%

Excessive  debt  highly  concentrated  (2012;  bn.  €)  

   •  1/3  of  exc.  debt  held  by  Top  10  debtor  firms  •  1/2  of  exc.  debt  held  by  Top  50  debtor  firms  •  70  %  of  exc.  debt  held  by  Top  300  debtor  firms  

35%$

44%$

49%$

56%$

70%$

0%$ 10%$ 20%$ 30%$ 40%$ 50%$ 60%$ 70%$ 80%$

top$10$

top$30$

top$50$

top$100$

top$300$

(Ra3ng$B)$

(Ra3ng$Ba)$

(r=4)$

A  snapshot  of  top  debtor  firms    

•  Top  50  hold  1/2  of  total  exc.debt,  but  account  for  less  than  10%  VA,  empl.  &  exp.  •  Top  300  hold  70%  of  total  debt,  but  account  for  12-­‐16%  of  VA,  empl.  &  exports  

top$50 top$51(100 top$101(300 top$300 Other$debtors

No$debt Total

Debt$overhang$(€$bn.) 5.6 0.9 1.6 8.1 3.4 11.5Share$in$(%):debt$overhang 48.9 7.5 13.8 70.2 29.8 100value$added 9.4 1.0 3.2 13.6 68.8 18.0 100employment 7.4 1.4 3.3 12.0 69.6 18.4 100exports 10.2 2.1 3.6 15.9 72.3 11.9 100

...  but  debt  is  a  bigger  problem    

•  1/4  of  all  firms  is  burdened  by  excessive  debt  •  Holding  30%  of  total  debt  only,  but  accounlng  for  70%  of  VA,  empl.  &  exports  

48.9%

70.2%

29.8%

0.0%

9.4%

13.6%

68.8%

18.0%

7.4%

12.0%

69.6%

18.4%

10.2%

15.9%

72.3%

11.9%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

top%50%

top%300%

Other%debtors%

No%debt%

exports%

employment%

value%added%

debt%overhang%

%  Firms  in  danger  of  default  

         Crilcal:  •  Real  estate  •  Electricity  &  gas  •  Hotels  &  restaurants  •  Holding  companies  •  Retail    

 

0.0#

10.0#

20.0#

30.0#

40.0#

50.0#

60.0#

70.0#

80.0#

90.0#

Electricity,#gas#

Real#estate##

Arts,#entertain.#and#recrea=on#

Hotels#and#restaurants#

Profess.,#scient.#and#technical#act.#

Water#supply;#sewerage,#waste##

Agriculture,#forestry#and#fishing#

Construc=on#

Human#health#and#social#work#act.#

Wholesale#and#retail#trade#

Educa=on#

Other#service#ac=vi=es#

Manufacturing#

Inform

a=on#and#communica=on#

Administ.#and#support#services#

Transporta=on#and#storage#

Mining#and#quarrying#

debt/#EBITDA#

Interest#coverage#ra=o#

Altman#ZWScore#

Combined#default#ra=o#

Potenlal  adverse  effects  of  default  

•  3,000+  companies  in  danger  of  default  •  Potenlal  adverse  effects:  4  –  9  %  of  exports,VA  &  empl.    

No.$Firms Value$added

Employ3ment

Exports Debt$overhang

All#companies$in$danger$of$default 3,175 1,380 41,967 1,250 8,450in$%$of$total 13.7 13.0 14.4 7.1 73.5

Without#9#"too#big#to#fail"#companies 3,167 699 26,449 678 5,090in$%$of$total 13.7 6.6 9.1 3.8 44.3

Financial  soundness  and  performance  

•  Financial  soundness  is  central  •  It  enhances  firm  performance  •  Enables  firms  the  access  to  finance  /  equity  

•  An  empirical  study  conducted  for  EBRD:          Impact  of  financial  soundness  on  firm  performance  

•  Dep.var:  growth  of  VA/emp,  empl.,  exports;  inv.,  survival  •  EsNmaNng  two  alternaNve  models  

•  with  various  indicators  of  financial  soundness  

•  Data:  •  Whole  populaNon  of  firms,  period  2002-­‐2012  •  Controlling  for  pre-­‐crisis  (2002-­‐08)  and  crisis  (2009-­‐12)  

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Main  results  (key  coefficients)  

•  Firms  with  higher  leverage  perform  worse  •  During  the  crisis  financial  distress  becomes  more  constraining  

•  Firms  with  lower  interest  burden  perform  beper  

!0.02%

0%

0.02%

0.04%

0.06%

0.08%

TFP% VA/empl.% Empl.% Exports% Investm.% Survival%

Interest'coverage'ra-o'Pre!crisis%

Crisis%

!0.1%

!0.08%

!0.06%

!0.04%

!0.02%

0%

0.02%

TFP% VA/empl.% Empl.% Exports% Investm.% Survival%

Debt/EBITDA+

Pre!crisis%

Crisis%

Main  results  

•  Before  crisis  •  High  debt  (D/E)  reduces  growth  of  TFP,  VA/emp,  Investment  and  Exports  

•  Low  burden  of  interest  promotes  growth    

•  During  the  crisis  •  Overall  financial  soundness  becomes  essenNal  for  growth  •  Liquidity  becomes  a  key  for  survival  •  Micro  and  small  firms  are  affected  more  by  excessive  leverage  in  terms  of  employment  and  exports  

•  InteresNngly:  high  leverage  does  not  drive  default  •  Due  to  complex  and  inefficient  insolvency  procedures  

15

Debt  as  a  drag  on  economic  recovery  

•  Key:  Financial  soundness  is  essenNal  for  growth  •  Firms  facing  excessive  debt  cannot  issue  new  junior  debt  because  default  is  likely  •  Banks  reluctant  to  lend,  equity  holders  reluctant  to  invest  

•  Excessive  debt  becomes  self-­‐perpetuaNng    •  firms  are  unable  to  deleverage  due  to  falling  revenues  in  the  wake  of  recession,    

•  while  recessions  is  protracted  due  to  debt  overhang      •  An  overall  restructuring  framework  needed  

16

What  restructuring  framework  is  needed?  

•  Two  key  ingredients  (a)  FacilitaNng  the  exit  of  nonviable  firms    

•  strengthened  bankruptcy  law  •  strengthening  collecNve  rights  of  majority  creditors  

•  efficient  insolvency  procedures  •  out-­‐of-­‐court  restructurings  •  strengthened  (or  addiNonal)  courts  

 (b)  Timely  restructuring  of  debt  of  viable  firms    

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Restructuring  of  debt  of  viable  firms    

•  Key:  DiscriminaNng  between  viable  and  nonviable  firms  (based  on  Value-­‐maximizaNon)  

•  Focusing  on  firms  with  largest  impact  on  the  economy  •  Debt-­‐for-­‐equity  swap  è  BAMC  •  Debt  restructuring  of  viable  firms  

•  Debt  forgiveness  &  debt  rescheduling  &  interest  rate  reducNons  •  OperaNonal  restructuring  (reorganizaNon)  as  well  •  Providing  access  to  sufficient  financing  (state  guarantees)  

•  Full  privaNzaNon  or  private  equity  capital  where  possible  •  Role  of  foreign  senior  capital  in  aeracNng  private  capital  investment  •  AddiNonality;  Signaling  effect  (transparency)  

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Foreign  experience  from  major  financial  crises  

•  Similar  cases  (PL,  KOR,  THL)  •  All  corporate  debt  held  by  domesNc  banks  &  in  dom.  currency  •  Legal  reforms  focusing  on  improving  insolvency  procedures  and  strengthening  collecNve  rights  of  majority  creditors  

•  Financed  by  the  issuance  of  government  bonds  •  Fiscal  cost:  6  %  GDP  (Poland),  20  %  (Korea),  44  %  (Thailand)  

•  Time  frame:  2  –  4  years  •  The  experience  shows  

•  successfully  restructured  firms  can  relaNvely  quickly  return  back  to  the  pre-­‐crisis  trajectory  of  performance    

19

Thank  you  for  your  aeenNon!  

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