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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)
13
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
17
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)
18
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!
20