LAST month, the International Monetary Fund (IMF) officials made an interesting statement concerning corporate debt.
They said that governments around the world ought to beef up their insolvency systems and prepare to restructure or liquidate badly scarred firms as they withdraw the support provided during the height of the Covid-19 crisis, Reuters had reported.
The IMF said that corporate debt had reached US$83 trillion (RM349.47 trillion), or 98% of global gross domestic product, at the end of 2020, with advanced economies and China accounting for 90% of the nearly US$9 trillion (RM37.9 trillion) increase in 2020.
Now that central banks are raising interest rates to address inflation, firms’ debt servicing costs will increase and declining fiscal support will expose corporate vulnerabilities, the IMF officials had said.
They said that while governments were right to support firms financially through the pandemic, policymakers should be prepared to restructure or liquidate badly scarred firms.
The IMF pointed out that insolvency systems are weak in many countries. One local insolvency expert concurs.
“The government insolvency system is severely overworked. It moves at a snail's pace unless it is a high profile case or flagged as such by certain important parties,” he says.
The IMF meanwhile also appealed for governments to adopt strong governance and transparency safeguards to mitigate risks and have clear exit plans from the start while ensuring the involvement of private creditors.
The IMF report recommended some strategies and legal reforms for governments put in place to support the debt restructuring of viable firms. These include:
> Burden-sharing and debt-restructuring plans should make use of the access to information and skills of private creditors, as was the case with Mexico during the peso crisis of the mid-1990s and France during the Covid-19 pandemic.
Public creditors should actively participate in debt restructuring.
> Insolvency systems should be prepared to handle a large increase in cases. Countries with limited fiscal space and ineffective insolvency systems should rely more on out-of-court or hybrid restructuring (where the courts play a limited role to support negotiations between debtors and major creditors, and which can be implemented relatively quickly).
At the same time, they should tackle deeper reforms over the medium term to improve legal and institutional frameworks.
> Countries with fiscal space can provide continued support but should be mindful of the risks of moral hazard and “zombie” firms that survive only with state assistance.
> Governments were right to support firms financially through the worst of the pandemic.
They recognised the initial large premium on speed over precision and provided rapid support without distinguishing between enterprises that could be saved and those that should not.
Now policymakers should calibrate financial support and direct it efficiently to companies that are in need. They should also be prepared to restructure or liquidate badly scarred firms.
The local insolvency specialist noted that some countries have made it mandatory for private firms to take on jobs in the insolvency process.
He says Malaysia also had such a system however the cases were outsourced to only a select group of firms, which ended up not being efficient and hence the system was scrapped.
Meanwhile, a consultant for sustainable finance had this to say: “It’s inevitable that at some point throwing good money after bad money will have to stop.
“We need to ensure that we manage this exit in the most orderly and least damaging way possible, for both those who provided the capital and those receiving it”.
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