Danaharta – Malaysia...Mar 17, 2020 · The Kuala Lumpur Stock Exchange (KLSE) likewise grew sharply, quadrupling between January 1988 and January 1997 (Trading Economics). In June

PRELIMINARYYPFSDISCUSSIONDRAFT|MARCH2020

Danaharta–Malaysia

MalloryDreyer1

March17,2020

Abstract

AfterthedevaluationoftheThaibahtin1997,theMalaysianeconomyexperiencedturmoil(Meesook,p4).Asapartofthegovernment’sresponsetothefinancialcrisis,Danahartawasestablishedasanationalassetmanagementcompany,alongsidearecapitalizationagency,Danamodal,andadebtrestructuringbody,theCDRC,toaddressinstabilityinthefinancialsystem(DFR2005,p10-11).DanahartawasestablishedwiththepurposeofremovingNPLsfromthefinancialsystemandmaximizingtherecoveryvalueoftheNPLs(DFR2005,p10).TheDanahartaAct granted the agency special legal authority tomore efficiently resolveNPLs(DFR2005,p12).Danahartareceivedfundingfromthegovernmentandissuedzero-coupon,governmentguaranteedbondsinexchangeforassets,whichitpurchasedatmarketvalue (DFR 2005, p 16-19). To incentivize financial institutions to sell NPLs, Danahartaestablishedanincentiveandpenaltystructurewhichincludedaprofitsharingarrangement(DFR2005,p17-18).DanahartaalsomanagedRM27.97billioninNPLspreviouslyacquiredby the government and central bank (DFR 2005, p32). To resolve loans from viableborrowers,Danahartausedmethodssuchasloanrestructuring,settlement,orschemesofarrangement(DFR2005,p23).Danahartaappointedspecialadministrators,foreclosedonpropertycollateral,ortooklegalactionfornonviableborrowers(DFR2005,p23).Toconvertnon-cashrecoveryassetstocash,DanahartausedopentenderexercisesforpropertysalesandthefirstissuanceofaCLOinMalaysia(DFR2005,p27-28).Overitslifetime,Danaharta’sportfolio totaledRM52.42 billion ($13.8 billion) in face value ofNPLs, and it recoveredRM30.35billion(58percent),andrecognizedanetlossofRM1.14billiononRM8.94billiontotal invested (DFR 2005, p31-32, 37).WhenDanaharta ceased operations in December2005,theremainingRM2.88billioninresidualassetsweretransferredtoasubsidiaryoftheMinistryofFinance,Prokhas,forcollection(DFR2005,p40).

Keywords:Malaysia,assetmanagementcompany,NPL,ABS,

1ResearchAssociate,NewBagehotProject.YaleProgramonFinancialStability.mallory.dreyer@yale.edu


AtaGlance

EconomicinstabilityheightenedinMalaysiaafterthedevaluationoftheThaibahtinJuly1997 (Meesook, p4). ThoughMalaysia wasnot subject toadebtcrisis likeotherAsiancountries,ithadstructuralvulnerabilitiesinits financial system including increasedforeign capital and rapid growth of foreignbank debt (Pepinsky, p124). Thegovernment established Danaharta, thenational AMC, in addition to a debtrestructuring body and a recapitalizationvehicle in response the growing NPLproblem in 1998 (DFR 2005, p10).Danahartawasestablishedwithspeciallegalauthority from the Danaharta Act, and hadthe purpose to remove NPLs from thefinancial system and achieve maximumrecovery on its resolution of NPLs (DFR2005,p10,p12).

Danahartaacquiredassetsatmarketpriceinexchange for zero coupon government-guaranteedbondswithafive-yearmaturity(DFR 2005, p19). All financial institutionswereeligibletotransferNPLswithavalueofRM5 million or more to Danaharta (DFR2005, p15-16). In order to incentivize thesale of NPLs, Danaharta established anincentive and penalty structure whichincludedaprofitsharingarrangement(DFR2005,p17-18).DanahartaalsomanagedNPLsonbehalfofthegovernmentandcentralbank,though it required no capital to acquire the assets (DFR 2005, p20). Over its lifetime,Danaharta’sportfolio totaledRM52.42billion($13.8billion) inassets,bothmanagedandacquired (DFR 2005, p31). Danaharta utilized loan restructuring, settlement, andarrangement schemes to resolve NPLs of viable borrowers; for non-viable borrowers, itappointedspecialadministrators, foreclosedonproperty,ortooklegalaction(DFR2005,p23).DanahartarecoveredRM30.35billion,or58percentofitsportfolio,andrecognizedanetlossofRM1.14billiononatotalinvestmentofRM8.94billion(DFR2005,p33,p37).

Summary of Key Terms

Purpose: “Danaharta’s primary mission is to remove the non-performing assets from the system and manage them with the goal to maximize the proceeds from the recovery process” (Fung 2003, p30).

Launch Dates Announced May 20, 1998 (DFR 2005, p2) Established June 20, 1998 (DFR 2005, p2) First transfer: August 26, 1998 (Press Release)

Wind-down Dates

Date of Last Transfer: March 2001 Date of Last Asset Disposal: December 31, 2005

Program Size Bond issuance limited to RM15 billion ($3.95 billion)

Usage Acquired NPLs: RM 19.71 billion ($5.2 billion) (book) for RM8.94 billion ($2.35 billion) Managed NPLs: RM27.97 billion ($7.4 billion) (book) at no cost

Outcomes Recovered RM30.35 billion ($8 billion) on managed and acquired NPLs for a total loss of RM1.14 billion ($300 million) (DFR 2005, p31, 37)

Mandate Resolution and asset purchase Ownership

Structure Public

Notable Features

Incentive / penalty structure to encourage banks to sell NPLs

Malaysia – Danaharta


SummaryEvaluation

DanahartahasbeendescribedasasuccessfulexampleofanationalAMCinreportspublishedby agencies, such as the IMF,World Bank, and BIS (Cerruti, p93; Fung 2003, p35). It isrecognizedashavingstronglegalauthority,appropriatepricing,politicalbacking,adequatefinancialsupport,andaclearmandate.IthasbeennotedthatDanaharta’srecoverytotalswereimprovedbyincludingtheNPLsitmanagedonbehalfofthegovernment,astheseloansdidnotrequirepayment(Cerruti,p94).These loanshadahigherrecoverythanacquiredassets,andtheincomefromtheseloanspreventedDanahartafromincurringagreaterloss(Cerruti,p94).


Danaharta: Malaysia Context

GDP

$80B USD in 1998

Source: IMF International Financial Statistics

GDP per capita

$3263 USD in 1998

Source: IMF International Financial Statistics & World Bank

Database

Sovereign credit rating (5-year senior debt)

As of Q3 1998, Fitch: BB

Moody’s: Baa3 S&P: BBB-

Source: Bloomberg

Size of banking system

$122B USD in total assets

Source: World Bank – Global Financial Development Database

Size of banking system as a percentage of GDP

153% in 1998


Size of banking system as a percentage of financial

system N/A

5-bank concentration of banking system

61.5% of total banking assets in 1998


Foreign involvement in banking system

18% of total banking assets in 2001

Source: Cull et al. p47

Government ownership of banking system

0% of banks owned by the state in 2001

Source: Cull et al. p47 Existence of deposit

insurance No


Contents

AtaGlance .............................................................................................................................. 2SummaryEvaluation ............................................................................................................. 3

Contents...................................................................................................................................................5I. Overview...........................................................................................................................................1

Background ............................................................................................................................. 1ProgramDescription ............................................................................................................. 3Outcomes ............................................................................................................................... 6

II. KeyDesignDecisions....................................................................................................................81. Partofapackage–DanahartawaspartoftheMalaysiangovernment’sresponsetothecrisis,whichincludedarecapitalizationSPV,Danamodal,andadebtrestructuringagency,theCDRC. .......................................................................................... 82. LegalAuthority–ThePengurusanDanahartaNasionalBerhadAct(DanahartaAct)waspassedbyparliamentinAugust1998whileamendmentstotheNationalLandCodeActandtheDevelopmentFundsActwerepassedinSeptember1998. .................. 93. SpecialPowers–DanahartawasgrantedspeciallegalauthoritytomoreefficientlyresolveitsportfolioofNPLs. ................................................................................................ 94. Mandate–Danahartahadadualassetpurchaseandresolutionmandate. ........... 105. Communication–Danahartapresenteditselfasapreemptiveandkeymeasuretomitigateeconomicandfinancialinstability. ..................................................................... 106. OwnershipStructure/Funding–Danahartawasfully-ownedbytheMinistryofFinanceandreceivedRM3billionincapitalfromthegovernment. ............................... 117. Governance/Administration:Danahartahadanine-memberBoardofDirectors,athree-memberOversightCommittee,andanexecutivecommitteeandsubcommitteesresponsiblefordailyoversightandguidance. .................................................................. 128. Governance/Administration:Danahartaestablishedproceduresfortransparency,riskmanagement,andcorporategovernance. ................................................................. 139. Governance/Administration:DanahartaadoptedKeyPerformanceIndicators(KPIs)internallyinordertoachieveitsorganizationalobjectives. ................................ 1310. Size:Thoughthelegislationdidnotspecifyasizerestriction,DanahartawasauthorizedtoissueuptoRM15billioninbonds. ............................................................. 1411. EligibleInstitutions–AllfinancialinstitutionswereeligibletotransferassetstoDanaharta. ............................................................................................................................ 1412. EligibleAssets–NPLswithavalueofRM5millionorgreaterwereeligibleforDanahartatoacquire. .......................................................................................................... 15


13. AcquisitionConsideration(Funding):Danahartaissued5-year,zero-coupon,government-guaranteedbondsasconsiderationforacquiredNPLsfromtransferringfinancialinstitutions. ........................................................................................................... 1514. Acquisition:Pricing/Valuation–Danahartausedamarket-basedpricingmechanismtodeterminetransferprice. ........................................................................... 1615. Acquisition:Incentivesandpenalties–DanahartadevelopedanincentiveandpenaltystructuretoencouragefinancialinstitutionstosellNPLs. ................................ 1716. Acquisition;AssetPurchaseWindow–Danahartaestablishedtwopurchasewindows,withanopenandgeneralpurposefortheprimarycarve-outandamoreselectivesecondarycarve-out. ........................................................................................... 1817. Acquisition:Management--InadditiontoacquiringNPLsfromfinancialinstitutions,DanahartamanagedNPLsonbehalfofthecentralbankandgovernment. 1918. Exitstrategy–Danaharta’sresolutionapproachwastoachievemaximumrecoveryvaluefromtheNPLs. ........................................................................................... 1919. Disposal:Danahartaadopteda“softapproach”forborrowerswithviablebusinessesanda“hardapproach”forborrowerswithnonviablebusinessesorwhofailedtocomplywithloanrestructuring. .......................................................................... 2020. SpecialAdministration–TheDanahartaActprovidedspeciallegalauthoritytoDanahartatoappointSpecialAdministratorstocompaniesinordertomanagetheresolutionofNPLs. .............................................................................................................. 2121. Disposalofforeignloans–Danahartadisposedofforeignloansandmarketablesecuritiesthroughrestrictedtenderexercises. ................................................................ 2222. Disposal-Inordertorecovernon-cashassets,DanahartamanageditsportfolioofsecuritiesandissuedthefirstcollateralizedloanobligationinMalaysia. ................. 2223. Timeframe:DanahartadidnothaveapredefinedsunsetdateatthetimeofitsestablishmentbutultimatelyceasedoperationsonDecember31,2005. ..................... 23

III.Evaluation......................................................................................................................................23IV.References......................................................................................................................................24


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I. OverviewBackground

Malaysia’s economyexpanded rapidlybetween1988 and1996, growing an averageof 9percentannually(AriffandYap,p305).TheKualaLumpurStockExchange(KLSE)likewisegrewsharply,quadruplingbetweenJanuary1988andJanuary1997(TradingEconomics).InJune1997,thenetNPLratiointhebankingsectorwas2.2percentandtheratioofloanprovisionstoNPLswasapproximately100percent(AriffandYap,p311).Furthermore,therisk-weighted capital ratio was 12 percent, exceeding the 8 percent Basel Committeerequirement(BNMAR1998,Ch4p9).ComparedtoothercountriesimpactedbytheAsianFinancialCrisis(AFC),Malaysiawasrelativelylessexposedtoexternaldebt,withthetotaloutstandingforeigndebtequalto$45.2billionor42percentofGDPasofJune1997(AriffandYap,p306).Despite its relative strength, there were signals of economic weakness and structuralvulnerabilityinMalaysia(Meesook,p3),whichincluded“rapidgrowthofforeignbankdebt,imprudentlendingtoaboomingpropertysectorandsharemarket,apeggedexchangerate,andrapidinflowsofportfoliocapitalintotheKLSE”(Pepinsky,p124).Rapidgrowthinthepropertysectorandequitesandsecuritiesmarketledtoaheavyconcentrationoflendingwith42.6percentofdomesticloanstothetwosectors(Pepinsky,122-23).In1997,MalaysiahadthehighestratioofloanstoGDPinAsia,witharatioofprivate-sectordebttoGDPof192.5percent(Pepinsky,p122).

Figure1.MalaysianRinggittoUSDollarExchangeRateJanuary1997-December1998

Source:FRED

Because of economic structural weaknesses in Malaysia, the country was subject tocontagioneffectandwasimpactedwhenThailandfloateditscurrency,thebaht,inJuly1997(Meesook,p4).ThisledtopressureontheMalaysiancurrency,astheringgitfacedadrasticandrapiddevaluationwiththeexchangeratefallingfrom2.48ringgitperdollarinMarch


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1997to3.77ringgitperdollarbytheendof1997(AriffandYap,p313).Thecentralbank,BankNegaraMalaysia,attemptedtodefendtheringgitbyraisingshort-termrates,thoughthiswasultimatelyunsuccessful(Doraisami,p585-586).Theringgitfellto4.88perdollarbyJanuary1998(AriffandYap,p316).

Figure2.KualaLumpurStockExchange(KLSE)CompositeIndexbetween1990-2000

Source:TradingEconomics

The stock market collapsed in tandem with the rapid decline in the exchange rate, asinvestorsbegansellingstocksontheKLSEduetoeconomicuncertaintyandexchangeratedevaluation(AriffandYap,p314).TheKLSECompositeIndexfellfrom1,216.7inJanuary1997to594.4bytheendof1997beforefallingevenfurtherto262.7bySeptember1,1998(Azmi2013,p383).

UnlikeotherAsiancountries,MalaysiadidnotreceiveanIMFassistancepackage,thoughthecountry did receive technical advice and guidance (Meesook, p4). As a part of thegovernment’s initial response, it implemented policies in line with the IMF’srecommendations such as raising interest rates and tightening fiscal policy (Ariff andAbubakar, p421). As Malaysia had a relatively low level of external short-term debt, itavoidedtheexternaldebtcrisisimpactingotherAsiancountriesthatreceivedIMFpackages(Meesook, p4). Malaysia had financial regulations in place that prevented an excess ofhedgedorunhedgedshort-termforeigndebt(Doraisami,p585).

However,conditionsdidnotimprove,astheNPLratioreached11.4percentbyAugust1998andwasprojectedtoreach15percentbytheendoftheyear(DFR2005,p16).Despitetightermonetary and fiscal policy, devaluation of the ringgit continued (Doraisami, p585). OnSeptember1,1998,BNMintroducedselectiveexchangecontrolsandessentiallyeliminatedtheoffshoremarket for the ringgitbyprohibiting the transferof fundsbetweenexternalaccounts inorder topreventcurrencyspeculationandtrading(BNMSpeech1998).BNMalsopeggedtheringgittotheUSdollarat3.80ringgitperdollar(BNMSpeech1998).Thesemoveswere considered controversial and unconventionalwhen theywere implemented(AriffandYap,p305).


3

TheMalaysiangovernmentadoptednewbanking industryregulations inresponse to thecrisis(BNMAR1998,ch4p6).Becauseofthehighportionoflendingtothepropertyandinvestment sectors, BNM imposed a cap on banks to limit the total percent of loansoutstandingto20percentforthepropertysectorand15percentforthepurchaseofstocksorshares(1997-03-28PressRelease).TheNPLclassificationstandardwasloosened,astheperiodwasextendedfromthreemonthstosixmonths(BNMAR1998,ch4p6).TheNPLratiodecreased from approximately 13.6 percent on the three-monthmeasure to less than 8percent using the new six-month measure by the end of 1998 (Fung 2003, p31). Morestringent requirements were passed for NPL provisioning, and banks were required tocomplywith the riskweighted capital ratioonaquarterlybasis, fromapreviousannualrequirement(BNMAR1998,ch4p6-7).

ProgramDescription

The government established the National Economic Action Council in January 1998 toprepare a National Economic Recovery Plan (NERP) to restore financial and economicstability (DFR 2005, p10).2 The NERP included a recommendation that the governmentestablishanationalassetmanagementcompanytopurchaseNPLsinadditiontoanagencytorecapitalizefinancialinstitutions(DFR2005,p10).Thus,thegovernmentannouncedthecreationofPengurusanDanahartaNasionalBerhad(Danaharta),thenationalAMC,inMay1998(DFR2005,p2).Danahartawasestablishedwithdualobjectivesto“removetheNPLdistractionfromthefinancialinstitutionsandthereafterextractmaximumrecoveryvaluefromtheNPLs”(DFR2005,p11).Danamodal,anSPVestablishedtorecapitalize financialinstitutions,wasestablishedinAugust1998,andtheMalaysiangovernmentestablishedadebtrestructuringagency,theCorporateDebtRestructuringCommittee(CDRC)(DFR2005,p10-11).3TheCDRCprovidedaplatformforfinancialinstitutionsandviableborrowerswithoutstandingloansofRM50millionormoretonegotiatedebtrestructuringoutsideofcourtproceedings(BNMAR1998,Ch4p5).ASteeringCommitteechairedbytheBNMGovernorcoordinatedtheworkoftheDanaharta,Danamodal,andtheCDRC(BNMAR1998,ch4p13).

DanahartawasincorporatedonJune20,1998(DFR2005,p11).TheDanahartaAct,whichwas passed by the Malaysian Parliament on August 5, 1998, became operational onSeptember 1, 1998 (DFR 2005, p2). Additional legal authority was designated throughamendments to theNationalLandCodeActandtheDevelopmentFundsAct,whichwereenactedinmid-September1998(DFR2005,p2).TheMinisterofFinancewasresponsiblefortheoversightofDanaharta,andithadaBoardofDirectorsandathree-memberOversightCommittee (Fung 2004, p56; DFR 2005, p13). TheMinister appointed the nine-memberBoardofDirectors(DFR2005,p85footnote1).

TheDanahartaActgrantedDanahartaspeciallegalauthority(DFR2005,p12).TheDanahartaActgrantedittheauthoritytoappointaspecialadministratorandbypassthecourtprocessforforeclosure(DFR2005,p12).ThoughtheDanahartaActgaveDanaharta

2TheNEACwasaconsultativeagencytotheCabinetandwaschairedbythePrimeMinister,MahathirMuhammed(DFR2005,p10).3Formoreinformationonthecapitalinjections,seetheDanamodalcasebyDevynJeffereis.


4

specialpowers,itdidnotspecifycriteriaforeligibleassets,pricing,orfinancing(Cerruti,p91).

Thegovernmentprovidedthe initialcapital forDanaharta instages, totalingRM3billion,though Danaharta borrowed from the Employee Provident Fund (EPF)4 and KhazanahNasionalBerhad5tomeetitsinterimoperationalfundingneeds(DFR2005,p18).Inordertopurchaseassets,Danahartaissuedzero-coupon,governmentguaranteedbondswithafive-yearmaturitytothetransferringfinancialinstitutions(DFR2005,p19).Insomecases,suchas thepurchaseofunsecuredNPLsor thepurchaseofassets fromdevelopment financialinstitutionsorIslamicbanks,Danahartapaidcash(DFR2005,p20).AllfinancialinstitutionswereeligibletotransferassetstoDanaharta,providedthattheNPLshadavalueofatleastRM5million(DFR2005,p16).Danahartaacquiredassetsintwomajorpurchasewindows:the “primary carve-out” focused on removing NPLs from the banking sector while the“secondarycarve-out”requiredassetstomeetamoreselectivesetofcriteria(DFR2005,p21). Though it initially intended to acquire NPLs on a first-come-first-serve basis,Danaharta announced a prioritized acquisition approach in October 1998, with prioritygiventoweakerinstitutionsorthoserecapitalizedbyDanamodalaswellassecuredloans(DAR1998,p20).Thepurchasepricewasdeterminedbyloantype:securedloans,unsecuredloans, andexceptionally large loans (DFR2005,p16-17).Thepurchaseprice for securedloansbackedbypropertycollateralwasdeterminedbyanindependentappraiser’svaluationwhile the price of loans backed by shareswas determined by proportional stake in thecompanyandtheshareprices(DFR2005,p16).Thepurchasepriceforunsecuredloanswas10percentoftheoutstandingprincipal,andthepurchasepriceofexceptionallylargeloanswasanominalsum(thoughthiswasusedinfrequently)(DFR2005,p17).

InordertoencouragefinancialinstitutionstosellNPLs,Danahartaestablishedanincentiveandpenaltystructure(DFR2005,p17).Thefirstincentive(or“carrot”)wasaprofitsharingarrangementwherethetransferringinstitutionreceived80percentoftheprofitrecognizedon therecoveryofanNPLandDanahartareceived theremaining20percent (DFR2005,p17).Additionally,thetransferringfinancialinstitutioncouldamortizethelossonanNPLover a five-year period (DFR 2005, p18). The two penalties (or “sticks”) included therequirementthatNPLsnottransferredtoDanahartahadtobewrittendownto80percentofDanaharta’svaluationandthatDanahartawouldonlymakeoneofferforeachNPL(DFR2005, p18). These incentives and penalties were put in place to encourage financialinstitutionstoridtheirbalancesheetsofNPLs,despitethepossibilityoflossesanderosionof shareholder capital (DFR2005,p17).Furthermore,BNMrequired institutionswithanNPLratiogreaterthan10percenttoselltheirNPLstoDanaharta,andfinancialinstitutionswere required to sell NPLs to Danaharta in order to be eligible for recapitalization byDanamodal(DFR2005,p17;BNMAR1998,ch4p12).

4TheEmployeesProvidentFund(EPF)isthenationalpensionfundofMalaysia.FormoreinformationonEPF,seetheEPF/KWSPwebsiteathttps://www.kwsp.gov.my/.5KhazanahNasionalBerhadwasestablishedin1993asthesovereignwealthfundofMalaysia,anditisresponsibleformanagingthegovernment’scommercialassetsandinvestingforlong-termgrowth.Formoreinformation,seetheKhazanahNasionalBerhadwebsiteathttp://www.khazanah.com.my/


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InadditiontopurchasingNPLs,DanahartaalsomanagedNPLsacquiredbythecentralbankand government in the forced merger of two struggling banks, Sime Bank and BankBumiputraMalaysia,withstrongerbanks.SimeBankwasmergedwithRHBBankBerhadonJune 30, 1999, and Bank BumiputraMalaysia wasmerged with Bank of Commerce (M)BerhadonSeptember30,1999(BNMAR1999,ch4p4).Bothbanksreportedlargelossesduetononperformingloans,andBNMrecognizedthatthesizeandpotentialimpactofthetwo institutions’potential failureon the financial systemrequired intervention(BNMAR1999,ch4p4).Thedistressedassetsofbothbanksweretransferredtothegovernmentandcentralbankinordertofacilitatethemergers(DFR2005,p20).Thegovernmentandcentralbank transferred NPLs to Danaharta for management.; in return, Danaharta collected amanagement fee and determined a recovery strategy (DFR 2005, p20-21). In reporting,DanahartareferredtotheSimeBankandBankBumiputraNPLsas“ManagedNPLs”whereaspurchasedNPLswerereferredtoas“AcquiredNPLs”(DFR2005,p20).Danahartarelaxedtheminimumloansizerequirement for “ManagedNPLs” toRM1millionandabove(DFR2005,p21).

Figure3.Danaharta’sRecoveryStrategybyLoanType

Source:CreatedbyYPFS;TakatoshiandYuko,p33

Danaharta adopted an asset management company approach, as opposed to a rapiddispositionagencyorabaddebtwarehouse6(DFR2005,p11).Danaharta’sgoalwasto“elicitmaximum recovery from its NPL portfolio” (DFR 2005, p23). Danaharta determined therecoverystrategyonacase-by-casebasis,thoughthereweretwooverarchingstrategies:thesoftapproachorthehardapproach(DFR2005,p23).Viableborrowersweresubjecttothesoftapproach,whichinvolvedrestructuringandrehabilitation(DFR2005,p23).Nonviable

6 In the Danaharta 2005 Final Report, Danaharta stated that it adopted the AMC approach, in opposition to the rapid disposition agency or bad debt warehouse. This appears to be a component of its communication strategy.


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borrowers or those that failed to comply with restructuring were subject to the hardapproach, which involved foreclosure and special administration (DFR 2005, p23).Danahartaalsoacquired foreign loans,whichwere loanssubject toa foreign jurisdiction,whereDanahartadidnothavespecial legalauthority(DFR2005,p25).These loansweredisposedofthroughrestrictedtenderexercises(DFR2005,p25).

Outcomes

Danaharta completed asset acquisition during twowindows: the primary and secondarycarve-outs(DFR2005,p21).Theprimarycarve-outoccurredbetweenSeptember1998andJune30,1999(DFR2005,p21).ItremovedthebulkofNPLsfromthebankingsystemandfocusedonremovingNPLstoallowthebankingsectortoreturntonormallending.Intheprimarycarve-out,DanahartaacquiredRM39.3billionofloansatfacevalue,whilefinancialinstitutions rejected RM1.78 billion in offers (DFR 2005, p21). The secondary carve-outoccurredbetweenJuly1999andMarch31,2000,andhadamoreselectivesetofcriteriaforeligibleassets(DFR2005,p21;BNMAR1999,ch4p10).

AttheendofitsoperationsinSeptember2005,Danaharta’sportfoliototaledRM47.68billioninloanrightsacquired(LRA),withRM19.71billioninacquiredassetsandRM27.97billioninmanagedassets(DFR2005,p22).Theadjustedloanrightsacquired(adjustedLRA),whichincluded the accrued interest at the time of restructuring, totaled RM52.42 billion (DFR2005,p31).7

Inexchange forNPLs,Danaharta issued15tranchesof five-year,government-guaranteedzero coupon bondswhich raised RM7.92 billion in capital and had a total face value ofRM11.14billion(DFR2005,p54-55).DanahartapaidRM1.02billionincashforunsecuredloansorassetsfromIslamicbanksanddevelopmentfinancecompanies(DFR2005,p55).Bondsorcashwere issued inexchange foracquiredassets(DFR2005,p22).Onaverage,Danaharta purchased assets at a discount of 54.6 percent8 (DFR 2005, p22). BecauseDanahartatookoverthemanagementofNPLsfromthemergedSimeBank(RHBBank)andBBMB (Bankof Commerce (M)Berhad), these assets did not have an acquisition cost toDanaharta(DFR2005,p22).

Overthecourseofitslifespan,DanahartarecoveredRM30.35billionofitsportfolio,withatotal cash recovery of RM26.69 billion (DFR 2005, p33). The average recovery was 58percentofbookvalue;fortherecoveryonacquiredNPLs,theaveragerecoveryratewas49percentwhiletheaveragerecoveryrateformanagedNPLswas65percent(DFR2005,p32).

Table1.Danaharta’sRecoveryonAcquiredandManagedNPLs

RecoveryMethod

AdjustedLRARMbillion(a)

RecoveryRMbillion(b)

Recoveryrate(%)c=(b)/(a)

7 The Adjusted Loan Rights Acquired included the accrued interest at the time of restructuring, which is why the RM52.42 billion figure is larger than the total Loan Rights Acquired figure of RM47.68 billion. 8AccordingtotheDanahartaFinalReport(2005),DanahartapaidRM8.94billionatthetimeofacquisitionfortheRM19.71billioninacquiredNPLs.


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AcquiredNPLs

ManagedNPLs

AcquiredNPLs

ManagedNPLs

AcquiredNPLs

ManagedNPLs

Plainloanrestructuring

1.07 3.77 0.86 3.58 80% 95%

Settlement 3.55 8.55 3.11 6.41 88% 75%Schemesofarrangement

3.14 6.82 1.84 4.32 59% 63%

AppointmentofSpecialAdministrators

1.66 2.59 0.84 0.58 51% 22%

Foreclosure 9.12 3.69 2.62 1.65 29% 45%Others 3.81 3.29 1.74 2.60 46% 79%Legalaction 0.28 1.08 0.06 0.14 20% 13%Total 22.63 29.79 11.07 19.28 49% 65%OVERALL 52.42 30.35 58%

Source:DFR2005,p32

OftheRM26.29billionincashrecovery,RM17.48billionwasrecoveredfromNPLsmanagedfortheSimeGroupandBBMBgroup(DFR2005,p34).ThecashrecoveryontheseNPLswasrepatriatedtothegovernmentandBNMafterdeductingthemanagementfeeforDanaharta(DFR2005,p34).DanahartadistributedRM0.76billionincashandanunreportedvalueofsecuritiesto38financialinstitutions,astherewasaprofitonthemanagementoftheseNPLs(DFR2005,p34).

Danaharta converted non-cash recovery assets to cash through multiple methods (DFR2005,p26).DanahartasoldpropertiesviaopentenderanddesignedthetenderprocessforMalaysia(DFR2005,p66)9.DanahartaheldtenmajortendersandfifteensmallertendersasofSeptember30,2005(DFR2005,p68).Overthecourseofitsoperations,1,298propertieswerelistedfortenderwithavalueofRM3.7billion,andatotalof1,026propertiesweresoldfor RM2.17 billion (DFR 2005, p68). Danaharta sold readily tradable securities throughstockbrokersorfinancialinstitutionsinordertoconvertthesecuritiestocash(DFR2005,p71). Danaharta also issued the first occurrence of a collateralized loan obligationtransactioninMalaysiathroughitsassetbackedsecuritization(ABS)(DFR2005,p28).TheABSraisedatotalofRM308.57millionandhadasubscriptionrateof3.5timesfortheseniornotes(DFR2005,p28).

Danahartarepaiditsliabilitiesbythetimeitceasedoperations,includingtheRM3.0billionininitialcapitalfromthegovernmentandtheRM11.14billioninbonds(DFR2005,p38).Duetoamismatchbetweenbondmaturityandcashflowforthelasttwobondredemptionsin2004and2005,DanahartadrewRM650millionfromitsrevolvingcreditfacility,which

9 An open tender is a bidding process open to qualified bidders. The tender process varies across countries, but tender processes are structured and follow a set of procedures.


8

wascappedatRM1.4billion, inordertorepaythe liabilities(DFR2005,p38).DanahartarepaidtheRM650millionbySeptember2005(DFR2005,p38).

Danaharta recognized a lifetime loss of RM1.14 billion when it ceased operations onDecember31,2005(DFR2005,p37).Theremainingrecoveryassetswere transferred toProkhas,afully-ownedsubsidiaryoftheMinistryofFinanceIncorporated(DFR2005,p40).Danaharta transferred RM2.88 billion in assets, which included restructured loans,properties,securitiesorassetsunderlegalaction,toProkhas,forcollectionorrecovery(DFR2005,p33,40).In2010,ProkhashadcollectedRM2.92billionincashandhadanoutstandingbalanceofRM650million(Edge2009).ProkhasintendedtocollectthefullRM3.57billionbytheendof2011toreturntothegovernment(Edge2009).Sincecompletingthecollectionof the residual recovery assets, Prokhas evolved into a consulting and advisory body(Prokhaswebsite).

II. KeyDesignDecisions1. Partofapackage–DanahartawaspartoftheMalaysiangovernment’s

responsetothecrisis,whichincludedarecapitalizationSPV,Danamodal,andadebtrestructuringagency,theCDRC.

In January 1998, theMalaysian government established theNational EconomicAdvisoryCouncil(NEAC),aconsultingbodytotheCabinet,toproposeaplantoaddresstheeconomicand financial instability in Malaysia (DFR 2005, p10). The NEAC proposed the NationalEconomicRecoveryPlan(NERP),whichwaspublishedinAugust1998,withsixobjectivesfor economic recovery and financial stabilization (DFR 2005, p10; NERP Site). The planincludedthecreationofanationalassetmanagementcompanyandaspecialpurposevehicle(SPV)torecapitalizefinancialinstitutions(DFR2005,p10).DanahartawasestablishedastheAMC,andDanamodalwasestablishedsoonafterastherecapitalizationSPV(DFR2005,p10). In order to be eligible for capital injections, financial institutionswere required totransfertheirportfoliosofNPLstoDanaharta(BNMAR1998,ch4p12).Danamodalfollowedthe first-loss principle, which meant that the financial institution’s shareholders wererequiredtoabsorbthe first lossesonthesaleofassets toDanaharta(BNMAR1998,ch4p12).Danamodalonlyrecapitalizedviablefinancial institutions(BNMAR1998,ch4p12).ThegovernmentalsoestablishedtheCorporateDebtRestructuringCommitteetofacilitatedebtrestructuringnegotiations(BNMAR1998,ch4p13).Danaharta,Danamodal,andtheCDRCwereoverseenbyaSteeringCommitteeunderthecentralbank,whichcoordinatedtheactivitiesofthethreeagencies(BNMAR1998,ch4p13).SpecialfundswereestablishedtopromoteinvestmentinprioritysectorssuchastheFundforSmallandMediumEnterprises(BNMAR 1998, ch4 p13). The government announced amerger program for banks andfinancecompaniesinJanuary1998toconsolidatethebankingindustry,whichwasseparatefromtheNEAC’sproposal,thoughtheNERPdidencourageconsolidation(BNMAR1998,ch4p11).Figure4belowshowstherelationshipbetweentheagencies,banks,andborrowers:

Figure4.RelationshipbetweenDanaharta,Danamodal,andtheCDRC


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CreatedbyYPFS.Source:BNMAR1998,ch4p13

2. LegalAuthority–ThePengurusanDanahartaNasionalBerhadAct(DanahartaAct)waspassedbyparliamentinAugust1998whileamendmentstotheNationalLandCodeActandtheDevelopmentFundsActwerepassedinSeptember1998.

Thegovernment announced the creationofDanahartaonMay20,1998 (DFR2005,p2).DanahartawasestablishedonJune20,1998andincorporatedundertheCompaniesActof1965(DFR2005,p2,p;DAR1998,p13).DanahartawasgranteditsauthorityandspecialpowersthroughthePengurusanDanahartaNasionalBerhadAct(DanahartaAct),whichwaspassedbytheMalaysianParliamentinAugust1998(DFR2005,p12).InSeptember1998,amendmentstotheNationalLandCodeActandtheDevelopmentFundsActwerepassedbyParliament(DFR2005,p2).TheNationalLandCode(Amendment)Actof1998facilitatedtheimplementationofDanaharta’sspecialauthority(DFR2005,p14).

The Danaharta Act was amended by parliament on July 31, 2000 (DFR 2005, p3). TheamendmentswereintendedtoclarifyexistingprovisionsandsolveproblemsthataroseafterDanaharta began operations (DFR 2005, p15). The amendments included provisionsregarding statutory vesting, sale by private treaty, legal actions against Danaharta, theOversightCommittee,andspecialadministrators(DAR2002,p124-126).

3. SpecialPowers–DanahartawasgrantedspeciallegalauthoritytomoreefficientlyresolveitsportfolioofNPLs.

DanahartahadspeciallegalauthoritytomanageandresolveNPLs.Danahartacouldappointaspecialadministratoroverborrowersunabletorepaydebts,bypassingcourtprocedures(DFR2005,p13).Furthermore,Danahartacouldforecloseonaloan’sunderlyingpropertycollateralandavoidcourtprocedures,whichexpediteditsoperations(DFR2005,p14).The


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act also grantedDanaharta the ability to acquire assets through statutory vesting,whichallowedDanaharta to “step into the shoes of the selling financial institution” in order toexpeditethetransferandmanagementofNPLs(DFR2005,p12).Danaharta’slegalauthorityenabledittorestructureloansintwotothreemonths,ratherthanfourteentosixteenundernormalrestructuringundertheCompaniesAct(CookeandFoley,p40).TheDanahartaActdid not include provisions for pricing, financing, or eligible assets, which were to bedeterminedbytheBoardandmanagement(Cerruti,p91).

Section 72 of the Danaharta Act prohibited courts from granting injunctions againstDanaharta(DAR2003,p10).AborrowerfiledalegalsuitagainstDanahartain2002,andtheCourtofAppealsdeclaredthatSection72wasunconstitutionalandvoid(Azmi,p388;DAR2003,p10).Danaharta filedanappealagainst therulingat theFederalCourt, thehighestcourtinMalaysia,arguingthatthepowerswereconstitutionalandfair(DAR2003,p10).TheFederalCourtunanimouslydecidedthatSection72oftheDanahartaActwasconstitutionalandvalidinJanuary2004(DAR2003,p10).TheDanahartaActdoesnotpreventpartiesfromsuingDanahartaorwinningcompensationasdeterminedbythecourt(DAR2002,p11).

4. Mandate–Danahartahadadualassetpurchaseandresolutionmandate.

Danaharta’s primary objectives “were to remove the NPL distraction from the financialinstitutions and thereafter extractmaximum recovery value from the NPLs” (DFR 2005,p11).

5. Communication–Danahartapresenteditselfasapreemptiveandkeymeasuretomitigateeconomicandfinancialinstability.

WhenDanahartawasannounced,theManagingDirector,AzmanYahya,statedthathewasconfidentthatDanahartawouldbebeneficialfortheMalaysianeconomyandallowfinancialinstitutionstoreturnto“theirvitalroleinsupportingeconomicgrowth”(1998-06-04PressRelease).When theDanahartaActwaspassed, itwas framedasa “critical component inenablingDanahartatoundertakeitsuniquemission”(1998-07-14PressRelease).Thepressreleases related to Danaharta’s operational set up emphasized its quick establishmentrelative toother countries (1998-09-4PressRelease), and the1998BNMAnnualReportasserted that “[t]he speed atwhichDanahartawas set up and the financial commitmentextendedbytheGovernmentclearlydemonstratedtheseriousintentionoftheGovernmentto restructure and strengthen the banking sector” (BNM AR 1998, ch4 p12). Azmanemphasized that Danaharta’s ability to appoint special administrators could expediteresolutionsandbea“win-winsolution”fortheinvolvedparties(1999-03-16PressRelease).ThegovernmentassertedthatDanahartawouldnotbecomeabaddebtwarehouseorarapiddispositionagency;rather,Danahartawouldfocusonmaximizingtherecoveryvalueofitsportfolio of NPLs and minimizing the cost to the taxpayer (1999-04-07 Press Release).ThoughtherewerecriticismsthatDanahartawouldbeslowtoresolveNPLs,AzmanrejectedthecriticismandreiteratedthatDanaharta’s“roleistomaximizerecoveryon[its]assets”(Lopez).

ThefinalreportonDanahartaframedthecreationofthebodyasa“preemptivemeasure”toaddressgrowingeconomicdistress,astheestablishmentofDanaharta,Danamodal,andtheCDRC was “the Malaysian Government’s pre-emptive strategy in accelerating the


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restructuring and strengthening of the financial system” (DFR 2005, p11). Furthermore,Danahartaclaimedthatitfoughtapublicrelationswarassoonasitwasestablished,astherewerecriticswhobelievedDanahartawouldbailoutpoliticallyconnectedbusinesses(DFR2005,p48).Othersdoubtedthatitwouldbetransparentandfreefrompoliticalinterference;furthermore,therewasacommon“misconceptionthatDanahartawouldforgiveallNPLs”itacquired (DFR 2005, p48). Danaharta sought to combat public perception challengesthroughtransparencyinitsoperations,usingfrequentpressreleasesandreports(DFR2005,p48). From the time of his appointment as theManagingDirector, Azman committed tohaving“fulldisclosureandtransparency”ofDanaharta’soperations(Reuters1998).

6. OwnershipStructure/Funding–Danahartawasfully-ownedbytheMinistryofFinanceandreceivedRM3billionincapitalfromthegovernment.

Danahartawasfullyownedbythegovernment,astheMinisterofFinanceIncorporatedwasthe sole shareholder (DOR 1998, p16) 10. The government provided Danahartawith theinitial capital of RM3 billion in stages (DFR 2005, p18). Danaharta borrowed from theEmployeesProvidentFund(EPF)andKhazanahNasionalBerhadtosupplementitsfundingneedswhilewaitingforthefullcapitalization(DFR2005,p18).DanahartaborrowedatotalofRM1.3billionfromtheEPFandKhazanahNasionalBerhadoverthecourseofitslifetime(DFR2005,p38).Danahartaalsohadaccesstoarevolvingcreditfacilityfromaconsortiumof banks which was established to provide short-term financing in the event of a cashshortageat the timeofbondredemption(DAR2004,p11,p38).Danahartahadaccess toRM1.4billionintherevolvingcreditfacility.DanahartaborrowedRM650millionfromtherevolvingcreditfacilityfortheDecember2004andMarch2005bondredemptions,duetoamismatchbetweenthecashflowandbondredemption(DFR2005,p38).TheRM650millionloan was repaid by September 2005 (DFR 2005, p38). Danaharta issued government-guaranteedzero-couponbondsinexchangeforNPLsfromfinancialinstitutions(DFR2005,p19).

Table2.Danaharta’stotalliabilities(inRMbillion)

Liabilities Purpose Totalamountallocated

Amountutilized

Long-termloans(loansfromEPFandKhazanahNasionalBerhad)

Drawdownavailableforworkingcapital

2.00 1.30

Short-termloan(revolvingcredit) Toremedyatemporarymismatchbetweenloanrecoveryandbondredemption

1.40 0.65

10TheMinisterofFinanceIncorporated(MOFInc.)isaGovernment-LinkedInvestmentCompanyin(GLIC)inMalaysiawhichwasestablishedundertheMinisterofFinance(Incorporated)Actin1957.Itfunctionsasaninvestmentholdingcompanyforthegovernment,andtheActallowstheMinisterofFinancetoberepresentedbytheMOFInc.andenterintobusinesscontracts,acquirecompanies,andmanageassets.FormoreinformationontheMOFInc.andGLICs,seeGomez2018.


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Zero-couponbondsissuedtosellingfinancialinstitutions

Forloanacquisition 15.00 11.14

Total 18.40 13.09

Source:DFR2005,p38

7. Governance/Administration:Danahartahadanine-memberBoardofDirectors,athree-memberOversightCommittee,andanexecutivecommitteeandsubcommitteesresponsiblefordailyoversightandguidance.

TheMinisterofFinanceoversawDanahartaanditsoperations,asitwasthesoleshareholderof Danaharta (Act 587, p16). Danaharta had a nine-member Board of Directors, whichconsisted of representatives from both the public and private sector, which included aChairman, a Managing Director (i.e. the CEO), two federal government officials, threeindividualsfromtheprivatesector,andtwointernationalmembers(Act587,p14).AzmanYahya,theManagingDirectorfrom1998to2001,alsoservedastheheadoftheCDRC(DFR2005,p84;Arnold).BecauseDanaharta,Danamodal,andtheCDRCplayedcomplementaryroles, a Steering Committee was established to ensure coordination across the agencieswhichwaschairedbytheBNMGovernor(DAR1998,p19).

Figure5.Danaharta’sorganizationalstructure

Source:DFR2005,p51

The top-levelmanagementwasdivided into subcommitteeswhichwereoverseenby theManagementExecutiveCommittee(DFR2005,p51).ThesubcommitteesevolvedoverthecourseofDanaharta’soperations(DFR2005,p51).TheManagementExecutiveCommitteeoversawtheoperationsofDanaharta,determinedguidelinesfortheoperations,madekey


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decisions,andensuredadherencetopolicies(DFR2005,p51).OthercommitteesincludedtheManagementCreditCommittee,whichwasinvolvedintheacquisitionanddisposalofloans,theAssetManagementCommittee,whichreviewedanddecidedonthepurchaseandsaleofpropertyassets,andtheAssetandLiabilityCommittee,whichcontrolled liquidity,market and interest risks (DFR 2005, p51). As of 2003, Danaharta’s staff totaled 245individuals(DAR2003,p11).

TheDanahartaActincludedaprovisionforthecreationoftheOversightCommittee(Act587,p32). This three-member committeewas appointed by theMinister of Finance andwastasked with the following functions: approval of special administrator appointments,approvalofextensionormoratoriumperiodsforcompaniesunderspecialadministrators,and approval of the termination of special administrators (Act 587, p32). TheOversightCommitteewasestablishedinNovember1998(Fung2003,p32).

8. Governance/Administration:Danahartaestablishedproceduresfortransparency,riskmanagement,andcorporategovernance.

Danaharta establishedmeasures to ensure transparency of operations (DFR 2005, p49).Danahartaheldpressconferences,releasedpublicannouncements,andmaintainedapublicwebsite (DFR 2005, p49). Danaharta published bi-annual operations reports, quarterlyreports, andannual reports (DFR2005,p49).Danaharta adopted theMalaysianCodeonCorporate Governance which meant that it followed standards for professionalism andtransparency(DFR2005,p50).DanahartaalsoestablishedtheDanahartaAuthorityManualwhichdefinedtheresponsibilitiesandauthoritiesoftheBoardandmanagementcommittees(DFR 2005, p50). Furthermore, the Risk Management team reviewed all proposals, andDanahartawasestablishedwithastructuretoensurethat therewasnosingle individualwhocouldmakeaunilateraldecisionregardingtheresolutionofNPLs(DFR2005,p50).

9. Governance/Administration:DanahartaadoptedKeyPerformanceIndicators(KPIs)internallyinordertoachieveitsorganizationalobjectives.

DanahartaestablishedKPIsinternallyinordertoachieveitsobjectivesduringeachphaseofitsoperations;thephaseswereestablishment,acquisition,andresolution(DFR2005,p43).StaffremunerationwaslinkedtotheachievementoftheKPIs(DFR2005,p43).EachKPIhadabenchmarkandatimeframeforachievement(DFR2005,p43).TheKPIsandtheoutcomesrelatedtotheKPIareinTable3below:

Table3.Danaharta’sKeyPerformanceIndicatorsandPerformance

Phase KPI ActualPerformanceEstablishment Completeset-upwithin5months

(includingdraftlegislation,staffrecruitmentandformulationofpoliciesandprocedures)

ExceededKPI:Danahartabeganoperationswithinthreemonthsofitsannouncement

Acquisition

Timeframe:• Complete primary carve-out by

December31,1999• Complete secondary carve-out by

theMarch31,2000

Timeframe:• Exceeded KPI: Completed six

monthsaheadofschedule• MetKPI:CompletedonscheduleQuantity:


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Quantity:• Acquire RM8 billion by December

31,1998• Acquire RM33 billion (total) by

December31,1999

• Exceeded KPI: Acquired RM19.73billion in loans by December 31,1998

• Exceeded KPI: Acquired RM39.33billionbyDecember31,1999

Resolution Processing:• Process (meet with borrowers to

decideonanappropriatestrategy)RM30billionNPLSbyJune2000

• Process remainder of portfolio byDecember31,2001

LoanRecoveryRate:• Benchmarkof49.8percentforthe

loanrecoveryrate

Processing:• Exceeded KPI: Processed RM31.5

billionbyJune2000• Did not meet: Completed

processing the remainder by July2002

LoanRecoveryRate:• ExceededKPI:Loanrecoveryrate

of58percentasofSeptember30,2005

Source:DFR2005,p45

10. Size:Thoughthelegislationdidnotspecifyasizerestriction,DanahartawasauthorizedtoissueuptoRM15billioninbonds.

WhenDanahartawasestablished,theDanahartaActdidnotspecifyasizerestrictionthatlimitedtheamountofNPLsDanahartacouldacquire.However,DanahartawasauthorizedtoissueuptoRM15billioninzero-coupon,governmentguaranteedbondsinexchangeforassetpurchases(DFR2005,p38).

11. EligibleInstitutions–AllfinancialinstitutionswereeligibletotransferassetstoDanaharta.

All financial institutions were eligible to transfer assets to Danaharta. This includedcommercialbanks,financecompanies,developmentbanks,merchantbanks,Islamicbanks,and locally incorporated foreign banks (DFR 2005, p15). In order to be eligible forrecapitalizationbyDanamodal,financialinstitutionswererequiredtosellNPLstoDanaharta(BNMAR1998,ch4p12).BNMrequiredfinancialinstitutionswithanNPLratioof10percentorhighertosellNPLstoDanaharta(DFR2005,p17).

Table4.DanahartaUsagebyInstitutionType

InstitutionType #ofAccounts LoanRightsAcquired Fair PurchasePrice

CommercialBanks 451 11,402.2 4,427.7FinanceCompanies 131 3,769.5 1,804.1MerchantBanks 172 3,211.9 1,811.7Development FinancialInstitutions 42 1,161.2 749.1Offshore 1 123.1 104.7Others 1 42.7 42.7Total 798 19,710.6 8,940


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Source:DFR2005,p56-61

12. EligibleAssets–NPLswithavalueofRM5millionorgreaterwereeligibleforDanahartatoacquire.

DanahartacouldacquireNPLswithavalueofRM5millionorgreater(DFR2005,p16).ThesizecriterianarrowedDanaharta’soperationsandallowedittofocusonthehighervalueloanswhileaddressingapproximately70percentofthetotalNPLvalueinthebankingsector(DFR2005,p16).

13. AcquisitionConsideration(Funding):Danahartaissued5-year,zero-coupon,government-guaranteedbondsasconsiderationforacquiredNPLsfromtransferringfinancialinstitutions.

DanahartaelectedtoissuedomesticbondsinordertofinancethepurchaseofNPLs(DFR2005,p19).Danahartaconsideredaninternationalbondissuance,butduetoexchangerateuncertaintyandvolatility, itdeterminedthatan internationalsourceof fundingwouldbecostly (DFR 2005, p18). Thus, Danaharta issued domestic bonds directly to financialinstitutions as consideration for the transfer of NPLs (DFR 2005, p19). The bondsweregovernment-guaranteed, zero-coupon bonds with a five-yearmaturity (DFR 2005, p19).Danaharta issued 15 tranches of bonds between November 1998 and March 2000,approximatelyonetranchepermonth(DFR2005,p20).DanahartaraisedatotalofRM8.22billionincapitalfrombondissuances;thetotalfacevalueofthebondswasRM11.14billion(DFR2005,p20).Table5belowshowsthedetailsofthefifteenbondissuances:

Table5.DanahartaBondsIssuedforAcquiredNPLs

DateofIssue

FaceValue(RMbillion)

PriceforeveryRM100

inFV

Yield PVatissuedate(RMbillion)

MaturityDate

20Nov1998 1.022 69.832 7.150% 0.713 31Dec200330Dec1998 1.580 72.012 6.672% 1.138 31Dec200329Jan1999 1.105 71.301 6.654% 0.788 31Mar200426Feb1999 1.242 72.296 6.475% 0.898 31Mar200426Mar1999 1.393 72.758 6.445% 1.014 31Mar200429Apr1999 1.050 75.584 5.487% 0.793 30Jun200427May1999 0.511 76.229 5.400% 0.390 30Jun200429Jun1999 0.744 76.862 5.330% 0.572 30Jun200429Jul1999 0.527 76.223 5.319% 0.402 30Sep200426Aug1999 0.204 73.585 6.111% 0.150 30Sep200429Oct1999 0.575 76.365 5.283% 0.439 31Dec200429Dec1999 0.392 77.3673 5.194% 0.303 31Dec200431Jan2000 0.162 77.244 5.063% 0.125 31Mar200529Feb2000 0.305 77.697 5.025% 0.237 31Mar200531Mar2000 0.328 77.494 5.165% 0.255 31Mar2005Total BondsIssued

11.140 8.217


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Source:DFR2005,p54

Thebondscarriedazeroriskweightforcapital-adequacypurposes,andthebondscouldberediscountedwithBNMunder thecentralbank’sroleas lenderof lastresort (DAR1998,p33).Thebondscouldbetradedonthesecondarymarket(DFR2005,p20).Thebondsalsohadarolloveroption,whichallowedDanahartatorefinancethebondsuponmaturityforone,threeorfiveyears(DFR2005,p19).

14. Acquisition:Pricing/Valuation–Danahartausedamarket-basedpricingmechanismtodeterminetransferprice.

BNMrequiredevery financial institution tosubmitdetailsof theirportfolioofNPLswithvaluesofRM5millionandgreatertoDanaharta(1998-10-6PressRelease).DanahartareliedontherepresentationsfromthesellingbanksregardingthedetailsofsoldNPLsandincludedwarrantyprovisionsinthesalesagreements(DFR2005,p16).ThisallowedDanahartatoreturnNPLstothesellingfinancialinstitutionsatalaterdateiftheloandocumentationwasnotinplace(DFR2005,p16).

DanahartadeterminedthepurchasepriceforNPLsdependingontheloantype(DFR2005,p16). For secured loans, the purchase price was determined using the fair value of theunderlyingcollateral(DFR2005,p16).Forpropertycollateral,thefairvaluewas95percentofthemarketvalueoftheproperty,asdeterminedbyanindependentappraiser(DFR2005,p16).ForNPLsbackedbyshares,thefairvaluewasdependentonthesizeofthestakeinthecompanypledgedascollateral,withpremiumsforlargerstakes(DFR2005,p16).Thefairvaluewasdeterminedusingthemarketprice(MP),whichwasthelowerofthethree-monthaveragepriceortheclosingpriceatthepointofpurchase,andthenettangibleassets(NTA)basedonthelatestauditedfinancialstatementsofthecompany(DFR2005,p16).Thetablebelowshowsthecalculationofthefairvaluebasedonthepercentstakeinthecompany:

Table6.Calculationoffairvalueofshares

StakeinCompany FairValueLessthan5% LowerofMPandNTABetween5%and33% AverageofMPandNTAAbove33% HigherofMPandNTA

Source:DFR2005,p16

Forsecuredloansbackedbypropertyorshares,thefairvaluewascomparedtotheprincipalor loanamountoutstanding todetermine thepurchaseprice (DFR2005,p17).The tablebelowshowsthepurchasepriceforvariousscenarios:

Table7.Determinationofpurchasepriceforsecuredloans

Scenario PurchasePriceFV isgreater thanorequal to theloanamountoutstanding

Loanamountoutstanding

FV is less than the loan amountoutstanding but greater than or

FairValue


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equal to the principal amountoutstandingFV is less than the principalamountoutstanding

Danahartapaiduptofairvaluebutthe purchase price was theprincipalamountoutstandingandlosswasdeferreduntilrecovery

Source:DFR2005,p17

For the cases when the fair value was less than the principal amount outstanding,Danaharta’supfrontpaymentwasequal to the fairvalue, though thepurchasepricewasdefinedastheprincipalamountoutstanding(DFR2005,p17).AfterDanahartacompletedthe recovery of the loan, the surplus recoverywas subject to Danaharta’s profit sharingagreement,whichcappedtheprofitdistributed to theselling institutionat thedifferencebetweenthepurchaseprice(principalamountoutstanding)andthefairvalue(DFR2005,p17).

Forunsecuredloans,Danahartapaid10percentoftheprincipalamountforunsecuredloans,anamountthatDanahartacalledan“arbitraryfigure”(DFR2005,p17).ForexceptionallylargeloanswithavalueofmorethanRM200million,thepurchasepricewassetatanominalvalueequaltoapercentageoftheloanoutstandingorRM1(DFR2005,p17).Thismethodwasusedifthevaluationwas“onerousorinconclusive,”anditwasusedinfrequentlyasfewNPLswereacquiredusingthismethod.(DFR2005,p17).

15. Acquisition:Incentivesandpenalties–DanahartadevelopedanincentiveandpenaltystructuretoencouragefinancialinstitutionstosellNPLs.

ThoughDanahartahadtogenerallyacquireloansonawilling-buyer-willing-sellerbasis,itestablishedanincentiveandpenaltystructure,whichincludedtwoincentives,or“carrots”,and twopenalties,or “sticks”, toencourage financial institutions tosellNPLs(DFR2005,p17).

The incentives to sell to Danaharta included a profit-sharing arrangement and lossamortization (DFR 2005, p17-18). The profit-sharing arrangement allocated the surplusrecoveryfromthemanagementofNPLsincaseswherethefairvalueoftheloanwaslessthantheprincipalamountoutstanding(DFR2005,p17).80percentofthesurplusrecoverywent to the selling institution, while Danaharta kept 20 percent (DFR 2005, p17). Thesurpluswascalculatedbyaccount,withthesurplusrecoveryequaltothetotalrecoverylessthefairvalueanddirectcosts(DFR2005,p17).BecauseDanahartapaiduptothefairvalueincaseswhere the fairvaluewas less than theprincipaloutstanding, thesurplus for thesellinginstitutionwascappedatthedifferencebetweenthepurchasepriceandfairvalue(DFR2005,p17).Therewereexceptionstotheprofit-sharingarrangement,suchasinthecaseofexceptionallylargeloans(DFR2005,p18).WhenDanahartapaidanominalsumfortheloan,95percentofthesurplusrecoverywenttothesellinginstitutionwhileDanahartakept5percent(DFR2005,p18).IfDanahartapaidapercentageoftheprincipaloutstandingfortheloan,thetransferringinstitutionreceived90percentofthesurplusandDanahartareceived10percent(DFR2005,p18).


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SellinginstitutionswereallowedtoamortizelossesfromthesaleofNPLstoDanahartaoverafive-yearperiod,whichwasthesecondincentiveforfinancialinstitutionstosellNPLstoDanaharta(DFR2005,p18).Financialinstitutionswererequiredtowriteoff20percentoftheshortfallinthefirstyear,andaminimumof20percentinthefollowingyearsuntiltheloanlosswaswrittenoff(DFR2005,p18).WhenDanahartacompletedtheresolutionoftheloan,thetransferringinstitutionwasrequiredtowriteoffanyremainingloss(DFR2005,p18).

Thetwopenalties,or“sticks”,includedasingleopportunitytotransferloanstoDanahartaaswellastheimmediatewrite-downofloansthatwerenotsoldtoDanaharta(DFR2005,p18).DanahartaprovidedfinancialinstitutionswithonlyoneopportunitytoselleachNPL;anyNPLtheinstitutionelectednottosellcouldnotbesoldtoDanahartaatalaterdate(DFR2005,p18).Danahartaalsogavethefinancial institutionsalimitedtimeframetoconsideroffers to drive efficiency and prevent price negotiation (DFR 2005, p18). If a financialinstitutiondecidednot tosellanNPLtoDanaharta, itwasrequiredto immediatelywritedowntheloanto80percentofDanaharta’svaluation(DFR2005,p18).

16. Acquisition;AssetPurchaseWindow–Danahartaestablishedtwopurchasewindows,withanopenandgeneralpurposefortheprimarycarve-outandamoreselectivesecondarycarve-out.

Danaharta acquired assets during two purchase windows (DFR 2005, p21). The firstpurchasewindow,the“primarycarve-out”,occurredbetweenSeptember1998andJune30,1999(DFR2005,p21).Theobjectiveofthefirstroundofacquisitionswasto“relievethepressureonthebankingsystemcausedbyNPLs”;thus,allfinancialinstitutionswereeligibletosellNPLstoDanahartaduringthiswindow(DFR2005,p21).Danahartaannouncedthattheacquisitionwouldprioritizeweakerfinancialinstitutions,suchasthosereceivingcapitalinjectionsfromDanamodal,aswellasthosethatwerelikelytosellNPLstoDanaharta(1998-10-06PressRelease;BNMAR1998,Annexp18).FinancialinstitutionswereabletodeclineDanaharta’soffers,andRM1.78billioninoffersweredeclinedduringthefirstwindow(DFR2005,p21).

Thesecondpurchasewindow,the“secondarycarve-out”,occurredbetweenJuly1,1999,andMarch31,2000(DFR2005,p21).Danahartaestablishedamoreselectivesetofcriteriaforassetstobeeligiblefortransfer,whichincludedNPLsfromborrowersalreadyinDanaharta’sportfolio,NPLs fromborrowerswith a total value greater thanRM50million, unsecuredNPLstopubliccompanies,orNPLsfromfinancialinstitutionswithaNPLratiohigherthan10percent(DFR2005,p21).

TherewereminorchangestoDanaharta’sportfoliofollowingthetwopurchasewindows,asmoremanagedNPLsweretransferredtoDanaharta(DFR2005,p22).DanahartareturnedasmallquantityofacquiredNPLstothesellingfinancialinstitution(DFR2005,p22).


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17. Acquisition:Management--InadditiontoacquiringNPLsfromfinancialinstitutions,DanahartamanagedNPLsonbehalfofthecentralbankandgovernment.

DanahartamanagedNPLsonbehalfof the centralbankandgovernment for twodefunctbanking groups (DFR 2005, p20). Sime Bank reported massive losses in 1998 due toincreasedloandefaults,andBNMtookoverthebankin1998(DFR2005,p20).Inordertofacilitate amerger of Sime Bankwith RHBBank Group, another commercial bank, BNMcarvedoutSimeBank’sNPLsandmovedthemtoDanahartaformanagement(DFR2005,p20). Danaharta Managers Sdn Bhd (Danaharta Managers) was established andincorporated to manage the NPL portfolio from Sime Bank. Similarly, Bank BumiputraMalaysiaBerhadGroup(BBMBGroup),agovernment-ownedbankinggroup,reportedlargelosses due to NPLs in 1998 (DFR 2005, p20). BBMB Group was merged with Bank ofCommerce(M)BerhadafteritsNPLsweretransferredtoDanahartaformanagement(DFR2005,p20). In1999,DanahartaUrusSdnBhd (DanahartaUrus)was created tohold theNPLs.DanahartaManagersandDanahartaUruswerefullyownedsubsidiariesofDanaharta(DFR2005,p20).

UnlikeacquiredNPLs,NPLsfromBBMBGroupandSimeBankdidnotrequirepaymentfromDanahartatotakeoverthemanagementoftheNPLs(DFR2005,p20).Thus,therewasnoreportedpurchasepricefortheseNPLs,asthegovernmentandBNMalreadyownedtheseNPLs(DFR2005,p22).However,Danahartahadtohavelegalownershipinordertouseitslegal authority to manage and resolve the NPLs (DFR 2005, p20-21). Thus, DanahartaManagersandDanahartaUrusissuedzero-couponbondstoBankNegaraMalaysiaandtheMinistryofFinanceasconsideration for the loansandredeemedthemwith therecoveryfrom the respective loans (DFR 2005, p21). These bondswere different from the bondsissuedbyDanahartatoacquireNPLsfromotherfinancialinstitutions(DFR2005,p21).TheloansizerestrictionofRM5millionwasrelaxedforBBMBGroupandSimeBank,DanahartamanagedloanswithminimumvalueofRM1millionfromthebankgroups(DFR2005,p21).

InexchangeformanagingtheNPLsfromSimeBankandBBMBforBNM,Danahartareceivedamanagementfee(DFR2005,p21).Iftherecoveryvaluewaslessthanorequaltothenetbookvalue,Danahartareceived2percentofthenetrecoveryvalue(DFR2005,p21).Iftherecovery valuewasmore than book value, Danaharta received 20 percent of the excessrecovery inadditiontothe2percentofnetbookvalue(DFR2005,p21).Afterdeductingmanagement fees, the recovery on the management of these loans accrued to thegovernmentandBNM(DFR2005,p21).

18. Exitstrategy–Danaharta’sresolutionapproachwastoachievemaximumrecoveryvaluefromtheNPLs.

Danaharta’sgoal for itsportfolioofbothmanagedandacquiredNPLswas torecover themaximumvalueontheresolutionofNPLs(DFR2005,p23).Danahartaadoptedtheassetmanagementcompanyapproach,asopposedtothewarehousingagencyorrapiddispositionagencyapproaches(DFR2005,p11).DanahartaelectedtomanageNPLsonanaccountbyaccount basis to determine the recovery strategy (DFR 2005, p12). Recovery strategiesdependedonthenatureandcircumstancesofeachNPLaccount(DFR2005,p12).


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19. Disposal:Danahartaadopteda“softapproach”forborrowerswithviablebusinessesanda“hardapproach”forborrowerswithnonviablebusinessesorwhofailedtocomplywithloanrestructuring.

Danaharta evaluated the viability of a borrower’s business, and if the business wasconsideredviable,theNPLswereaddressedusingthe“softapproach”method(DFR2005,p23). Danaharta’s soft-approach, or loanmanagement, included loan restructuring, loansettlement,andschemesofarrangement(DFR2005,p23)11.Thegoalofloanrestructuring,whichincludedtheextensionofrepaymentperiodsorreschedulingofloanpayments,wastohavetheNPLbecomeperforming(DFR2005,p24).Everyviableborrowerwasgivenoneopportunity to restructure the loan in compliance with Danaharta’s Loan RestructuringPrinciplesandGuidelines(DFR2005,p23).Theseguidelinesincludedmeasurestomaximizerecovery,minimize taxpayer burden, ensure equal treatment of stakeholders, andutilizeDanaharta’s special powers (DFR 2005, p62-63). Danaharta also provided additionalguidelinesforcorporateborrowers,individualborrowers,andguarantors(DFR2005,p62).Loan settlementwas another option for viable borrowers; theseborrowers opted for anexpedited settlement of the loans, usually within a year (DFR 2005, p24). Schemes ofarrangement required agreement between creditors and borrowers and required courtapproval(DFR2005,p24).

Forborrowerswithnon-viablebusinessesorforborrowersthatfailedtocomplywithloanrestructuring, Danaharta’s resolution strategy, the “hard approach”, included theappointmentofspecialadministrators,foreclosure,legalactionorotherresolutionmethods(DFR2005,p23).

Danahartacouldforecloseoncollateraliftheborrowerfailedtorepayitsloan(DFR2005,p14).Danahartawasrequiredtoissuea30-daynoticetoaborrowerofitsintenttoforecloseanddisposeof thepropertycollateral if theborrower failed torepay the loanwithin thetimeframe (Azmi,p387).Danaharta’s specialpowers for foreclosureallowed it tobypasscourtprocedures(DFR2005,p14).Becauseofstatutoryvesting,theborrowermaintainedtheownershipofthecollateralproperties,thoughDanahartaultimatelysoldtheproperty(DFR2005,p66).However,Danahartaownedthepropertiesthatweretransferredtoitasaformofloanrepayment(DFR2005,p66).Danahartaadoptedtheopen-tenderapproachtosellproperties(DFR2005,p66).Propertiesputupfortenderwererequiredtohavetheircurrentvaluelistedpublicly,inadditiontoaconfidentialreservepricetopreventfiresales(DFR2005,p66).Danahartarecruitedrealestateagentstoassistwithmarketingpropertiesnationally(DFR2005,p67).Prospectivebuyerscouldreferencethelatestvaluationreportoftheproperty,thesaleandpurchaseagreement,andtermsandconditionsofthesalebeforeplacingabid(DFR2005,p67).Buyersreceivedastamp-dutywaiverforallpropertiesboughtfromDanaharta(DFR2005,p68).12Danahartaalsoprovidedfinancingatcompetitiverates

11 As Malaysia does not have an equivalent of Chapter 11 bankruptcy, a court administered scheme of arrangement is an option for debt restructuring. Pursuant to the Companies Act, the scheme of arrangement requires the approval of the High Court. See Options for Debt Restructuring in Malaysia for a brief explanation. 12Astampdutyisataxonlegaldocumentssuchasasaleandpurchaseagreement.


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forthefirstseventendersandpromisedvacantpossessionoftheproperty13(DFR2005,p68-69FN2).Thepropertieswerepromisedtobuyersfreeofencumbranceswithinninemonthsofthesigningofthesaleandpurchaseagreementorthebuyercouldterminatethesale(DFR2005, p68). At the close of each tender exercise, the bids were collected by a TenderCommittee,whichwascomposedofseniormanagementatDanahartanot involvedinthetenderprocess (DFR2005,p67).Thewinningbidswerepresented to theTenderBoard,which was compromised by the Managing Director of Danaharta, another Danahartarepresentative,anappraiser,andarepresentativefromtheForeignInvestmentCommittee(DFR 2005, p67). Only the agent whose client successfully won the bidding received acommissiononthesale(DFR2005,p68).Overall,Danahartapaidapproximately5percentofthesaleproceedsforagencyfeesandmarketingcosts(DFR2005,p68).

Legal action against a borrower was the “last resort” option for Danaharta, after it hadattemptedtheotherstrategies(DFR2005,p24).Thiswasnotapreferredresolutionmethodduetotheextensivetimeandmonetarycommitmentandtheminimalrecoveryvalue(DFR2005, 24). Other methods included partial resolution, company liquidation, or theappointmentofreceiversormanagersoveracompanyorassets(DFR2005,p24).

20. SpecialAdministration–TheDanahartaActprovidedspeciallegalauthoritytoDanahartatoappointSpecialAdministratorstocompaniesinordertomanagetheresolutionofNPLs.

TheDanahartaActgrantedDanahartathepowertoappointaspecialadministratoroveracorporateborrower,asubsidiary,asecurityprovider,oracompanywhosesharesDanahartaacquired, in the event that the borrower could not repay its loan (DFR 2005, p13). TheappointmentofaSpecialAdministratoreffectivelysuspendedthemanagementandpowersofthecompany’sBoard,asthespecialadministratorwastheonlypartyallowedtomanagethe company’s assets (DAR 2004, p116). The Oversight Committee first approved theappointmentofaspecialadministrator(DFR2005,p13).Thespecialadministratorassumedtemporary control of the company under administration, and the company wasautomatically placedunder a year-longmoratoriumwhichprevented actions frombeingtaken against the company by creditors (DFR 2005, p13). The special administratorpreparedaworkoutproposal,whichwasreviewedforreasonablenessbyanindependentadvisorappointedbytheOversightCommittee,andthenapprovedbyDanaharta(DFR2005,p13).Ameetingwiththesecuredcreditorsfollowed,whereamajorityinthevalueofsecuredcreditorswasrequiredtoapprovetheproposalbeforeitwasimplemented(DFR2005,p13).During the course of its operations,Danaharta appointed special administrators over 73companies(DFR2005,p24).

13Vacantpossessionreferstothereadinessofapropertytobeoccupiedandincludescertificationthatthepropertyiscompletedandsafeforoccupationandreadinesstobeconnectedtoelectricalandwatersupplies.


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21. Disposalofforeignloans–Danahartadisposedofforeignloansandmarketablesecuritiesthroughrestrictedtenderexercises.

Danahartadidnotexclude foreign loans in itsacquisitionofeligibleassets.Foreign loansincludedthosethatwerenon-Ringgitloansormarketablesecuritiesextendedtoorissuedbyforeigncompanies(DFR2005,p25).ThemajorityoftheseloanscamefromSimeBank,Sime Labuan, and BBMB (DFR 2005, p25). For foreign loans andmarketable securities,DanahartadeterminedthatthebestmethodtorecoverunderlyingvaluewastodisposeoftheNPLsforcashorswapfordomesticdebt,asDanaharta’sspeciallegalauthoritydidnotapply to foreign loans (DFR 2005, p25). Danaharta elected to use the restricted tenderexercise todisposeof foreign loans (DFR2005,p25). Internationalbanks that expressedinterest in purchasing the foreign loans were invited to participate; participants weredivided into Principal Bidders, who could bid on loans and securities, and MarketableAccountBidders,whocouldbidonlyonmarketablesecurities(DFR2005,p25).Danahartaheldfourrestrictedtenderexercises,withatotalofferingof110accountswithprincipalof$743.32million(RM195million)(DFR2005,p25).Intotal,Danahartasold85accountsfor$631.84million,atanaveragerecoveryof48percent(DFR2005,p25).

22. Disposal-Inordertorecovernon-cashassets,DanahartamanageditsportfolioofsecuritiesandissuedthefirstcollateralizedloanobligationinMalaysia.

Danaharta owned and managed a portfolio of securities that included irredeemable,redeemable,orconvertiblesecurities(DFR2005,p70).Danahartaacquiredthesesecuritiesin caseswhere loan settlementsweremade in securities (DFR2005,p70). Irredeemablesecuritiesincludedordinarysharesandirredeemableconvertibleloanstocks.Redeemablesecuritiesincludedsecuredloanstocks,unsecuredloanstocks,andpreferenceshares(DFR2005,p70).Convertibleshareswereloanstocksandpreferencesharesthatwereconvertibletoequityshares.Danahartadisposedofsharesifthesharepriceexceededapredeterminedtarget price (DFR 2005, p70). However, if the target pricewas notmet, Danaharta usedtenderexercisesforcontrollingblocksofirredeemablesecurities,marketmechanismsfornon-controllingblocksofirredeemablesecurities,andredemptionofredeemablesecuritiestodisposeofthesecuritiesinitsportfolio(DFR2005,p70).Danahartasoldreadilytradablesecurities through stockbrokers or financial institutions (DFR 2005, p71). For securitiessubjecttocallandputoptions,thedecisiontodisposewasgovernedbyitsspecificcallandputoptionagreement(DFR2005,p71).

Danahartaadoptedasset-backedsecuritization(ABS)asamethodtoexpeditetherecoveryonrestructuredloans(DFR2005,p28).Danahartatransferredaportfolioofloansandcash,valued at RM595million, to an SPV, SecuritaABSOneBerhad, in exchange for cash andsubordinatednotesfromtheSPV(DFR2005,p74).TheportfolioincludedRM579.2millioninloans,adiscountofRM1.5million,andRM14.7inreservefunding(DFR2005,p74).OnDecember 20, 2001, Danaharta issued RM310 million AAA-rated senior notes with amaturityofDecember2005andcouponrateof3.75percent(DFR2005,p74).Theseniornotes were issued at 99.54 percent of par value, and the response to the issuance waspositivewithorderstotalingoverRM1billionwhichisasubscriptionrateof3.5times(DFR2005,p74).DanahartaassumedtheRM285.4millionunratedtrancheofsubordinatednotes,


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which meant it would absorb any shortfall up to RM285.4 million (DFR 2005, p74).DanahartaraisedRM308.57millionfromtheissue(DFR2005,p75).SecuritaABSOnebeganredeeming the senior notes in stages from May 2003 to June 2004 and completedredemptioneighteenmonthsaheadofschedule,includingRM18.4millionininterestcosts(DFR 2005, p75). Danaharta only did one ABS exercise because the alternate recoveryoptions“weregeneratingcashwellenoughtoretireDanaharta’sbondontime”(DFR2005,p28). Danaharta’s ABS issuancewas the first occasion of a collateralized loan obligation(CLO)transactioninMalaysia(DFR2005,p28).

23. Timeframe:DanahartadidnothaveapredefinedsunsetdateatthetimeofitsestablishmentbutultimatelyceasedoperationsonDecember31,2005.

Atthetimeofitsestablishment,Danahartadidnothaveapredefinedsunsetdate.Inthe1998BNMAnnualReport,itwasestimatedthatDanaharta’slifespanwouldbebetweensevenandtenyears(BNMAR1998,Annexp19).However,by2001,Danahartaseta target towinddownbytheendof2005(DAR2001,p17).DanahartaceasedoperationsonDecember31,2005,andtransferredremainingcashtotheMinistryofFinance(DFR2005,p31).

DanahartaprojectedthatatotalofRM2.88billioninresidualrecoveryassetswouldremainbyDecember2005(DFR2005,p40).TheresidualrecoveryassetsweretransferredtotheMinisterofFinance Incorporated, forconversiontocashbeginning January1,2006(DFR2005,p40).TheMinisterofFinanceIncorporateddesignatedProkhasSdnBhd(Prokhas),afully-owned subsidiary, the collection agency for the remaining residual recovery assets(DFR2005,p40).Thus,theownershipoftheassetsremainedwithDanaharta,whichbecameadormantcompany,untilthecompletionofrecovery(DFR2005,p40).

III. EvaluationIn evaluations of AMCs, Danaharta is often considered a “success story” (Cerruti, p93).ScholarsrecognizethatDanahartapreventedfurtherincreasesinNPLs,repaiditsbondsontime,completeditsoperationsinsevenyears,andincurredasmalllossforthegovernment(Cerruti,p93).TheIMFconsideredtheplanforDanahartatobe“well-conceived,”asithadamanageableportfolioofloanstoresolveandanappropriatefocusonresolutioninsteadofwarehousingorrapiddisposition(Meesook,p76).TheBankforInternationalSettlements(BIS) considered Danaharta to be a “fairly effective policy instrument in removing andresolvingNPLsinassetrecovery”asithadlegalauthority,acoordinatedstrategy,financialsupport,andpoliticalbackingthatenabledittooperateefficiently(Fung2003,p35).

During Danaharta’s operations, the IMF warned that Danaharta’s purchase price couldoperateasatooltobailoutexistingshareholdersifthepricewassetatavaluehigherthanthe fair value (Meesook, p76). The IMF noted that Danahartawas using an appropriate,market-based mechanism for valuation, as selling banks rejected Danaharta’s offers onRM4.2billioninbookvaluebecausetheofferswereconsideredtoolow(IMF1999,p64).

CerrutiattributesDanaharta’ssuccesstoacombinationof factorswhichwerethedesign,economicenvironmentandoperations.Thedesignhada“clearmandateandenablinglegal


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environment”whichenabledDanahartatooperateeffectivelywithstrongguidance(Cerruti,p95).Theeconomicenvironmentwasalsoimproving,astheeconomyreboundedandthecapital controls and interest rates contributed to a positive environment for borrowers(Cerruti,p95;Doraisami,p586).Furthermore,Danahartahad“strongcorporategovernanceand transparency”, as it adopted KPIs, followed the Malaysian Code of CorporateGovernance, published frequent reports, and had stable management and governance.(Cerruti,p95).TheIMFrecognizedsimilarattributes,suchasthebroadlegalmandatewhichenabled Danaharta to operate efficiently (Meesook, p74). Furthermore, Danaharta’sincorporationundertheCompaniesActrequiredittoundergoregularauditingtoensuretransparencyandaccuracy(Meesook,p74-76).

Danahartaprovidedampleself-evaluationinitsfinalreport.DanahartaassertedthatitmetalloftheBIS’scriteriaforaneffectiveAMCwhichincludestrongpoliticalwill,supportivelegal infrastructure, efficientmarketenvironment, clearAMCmandate,welldefinedAMClifespan, adequate governance, good transparency, realistic asset pricing, and speedyresolutions(DFR2005,p47).Danahartawasvisitedbyinternationalagencies,suchastheWorldBankandIMF,aswellasothernationalAMCsduringthecourseofitsoperations(DFR2005,p3).Danahartacreditsitsoperationswithpreventingabankingcrisisandloweringthe costofNPL resolution, as theNPL ratiobegan todecreaseafterDanahartabegan itsacquisition(DFR2005,p46).

However,Danaharta’srecoveryfigureswereimprovedbyincludingthemanagedloansfromBBMBandSimeBank,asDanahartadidnothavetopurchasetheseassets(Cerruti,p94).Themanagedloansyieldedahigherrecoveryratethantheacquiredassets.Withouttheincomefromthemanagedloans,Danahartawouldhaveincurredagreaterloss(Cerruti,p94).

Furthermore, Inoguchi evaluated the effects of AMCs on the NPL ratio in Thailand andMalaysiaandfoundthattheeffectofsellingloanstoDanahartaisunclear(Inoguchi,p605).This is due to theNPL ratio increasing after the period inwhich the assetmanagementcompany completed its assetpurchases (Inoguchi, p629). Inoguchi concludes that “[i]t ispossiblethattheincreaseinloanssoldtoDanahartaaffectedtheNPLratiobecausesomecoefficients were significant and the NPL ratio rose after the period in which the assetmanagementcompanyceasedpurchasing loans” (Inoguchi,p629).Heconcludes that it islikely that Danaharta’s role in solving the NPL problemwas smaller than the impact ofThailand’sAMC(Inoguchi,p629).

IV. References(1997-03-28PressRelease)NewMonetaryMeasures(28March1997).BankNegaraMalaysia.

http://www.bnm.gov.my/index.php?ch=en_press&pg=en_press&ac=3103&lang=en(1998-06-04PressRelease)DetailsonAssetManagementCompany(4June1998).Danaharta.

https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(1998-08-27PressRelease)DanahartaAcquiresFirstNPL(27August1998).Danaharta.https://web.archive.org/web/20041206224342/http:/www.danaharta.com.my/default.html


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(1998-09-04PressRelease)DanahartaBillbecomesLaw(4September1998).Danaharta.https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(1998-10-06PressRelease)Danaharta'sAcquisitionApproach(6October1998).Danaharta.https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(1999-03-16PressRelease)DanahartaWorkoutSolution-AWin-WinSolution(16March1999).Danaharta.https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(1999-04-07PressRelease)Danahartaunveilsloanrestructuringguidelines(7April1999).Danaharta.https://web.archive.org/web/20050112233814fw_/http:/www.danaharta.com.my/public/RestructuringGuidelines.html

(Act587)PengurusanDanahartaNasionalBerhadAct1998(1998).http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Act%20587%20-%20Pengurusan%20Danaharta%20Nasional%20Berhad%20Act%201998.pdf

(AriffandAbubukar)Ariff,MohamedandAbubakar,SyarusaYanti(1999).TheMalaysianFinancialCrisis:EconomicImpactandRecoveryProspects.http://www.ide.go.jp/library/English/Publish/Periodicals/De/pdf/99_04_03.pdf

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(Arnold)Arnold,Wayne(12December2002).CleaningUpMalaysia'sBadDebts.NewYorkTimes.https://www.nytimes.com/2002/12/12/business/cleaning-up-malaysia-s-bad-debts.html

(Azmi2013)Azmi,RuzitaandAdilahAbdRazak(2013).TheRoleofDanahartainManagingandRehabilitatingFinanciallyTroubledCompaniesinMalaysia-PartOne.https://www.researchgate.net/publication/312091574_The_Role_of_Danaharta_in_Managing_and_Rehabilitating_Financially_Troubled_Companies_in_Malaysia_-_Part_One

(Azmi2015)Azmi,RuzitaandAdilahAbdRazak(2015).TheRoleofDanahartainManagingandRehabilitatingFinanciallyTroubledCompaniesinMalaysia-PartTwo.http://www.chasecambria.com/site/journal/article.php?id=859

(BNMAR1998)BankNegaraMalaysiaAnnualReport1998(1998).http://www.bnm.gov.my/index.php?ch=en_publication&pg=en_ar&ac=2&lang=en&uc=2

(BNMSpeech1998)GovernorTanSriAliAbulHassan'sSpeechattheNationalCongressonEconomicRecovery-"TheWayForward"(6October1998).

http://www.bnm.gov.my/index.php?ch=en_speech&pg=en_speech&ac=94&lang=en(Cerruti)Cerruti,Caroline;Neyens,Ruth.(2016)PublicAssetManagementCompanies:A

Toolkit.WorldBankStudies;.Washington,DC:WorldBank.WorldBank.https://openknowledge.worldbank.org/handle/10986/24332

(CookeandFoley)Cooke,DavidandFoley,Jason.TheRoleoftheAssetManagementEntity:AnEastAsianPerspective.http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.202.9578&rep=rep1&type=pdf

(DAR1998)1998DanahartaAnnualReporthttps://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html



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(DFR2005)DanahartaFinalReport(2005)http://www.prokhas.com.my/images/stories/final_report.pdf

(DOR1998H2)DanahartaOperationsReportfortheperiodfrom20June1998to31December1998(1998).https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(DOR1999H1)DanahartaOperationsReportforthesixmonthsended30June1999(1999).https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html

(DOR1999H2)DanahartaOperationsReportforthesixmonthsended31December1999(1999).https://web.archive.org/web/20041206224342/http://www.danaharta.com.my/default.html










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(Edge2009)Corporate:ProkhasrecoupsRM2.92binfouryears(20September2009).TheEdge.https://www.theedgemarkets.com/article/corporate-prokhas-recoups-rm292b-four-years

(FRED)Malaysia/USForeignExchangeRate(2019).https://fred.stlouisfed.org/series/DEXMAUS(Fung2003)Fungetal.(2003).PublicassetmanagementcompaniesinEastAsia-Casestudies.

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AssetManagementCompaniesinMalaysiaandThailand.PacificEconomicReview,21(5),603-631.https://onlinelibrary.wiley.com/doi/full/10.1111/1468-0106.12197

(Lopez)Lopez,Leslie(12December1998).Malaysia'sDanahartaSeeksWaystoDisposeofBadLoans.WallStreetJournal.https://www.wsj.com/articles/SB945200627619025658

(Meesook)Meesook,Kanittaetal.(2002).Malaysia:FromCrisistoRecovery.InternationalMonetaryFund.

(Pepinsky)Pepinsky,Thomas(2009).EconomicCrisesandtheBreakdownofAuthoritarianRegimes:IndonesiaandMalaysiainComparativePerspective.CambridgeUniversityPress.

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