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  • The World Bank 1818 H Street, NW Washington, DC 20433 USA Telephone: 202.473.1000 Facsimile: 202.477.6391 Internet: www.worldbank.org E-mail: feedback@worldbank.org

    In the wake of the periodic financial crises of the late 1990s, the

    international financial institutions and many experts have recognized the

    need for a strategy to avoid and mitigate the severity of crises in the

    corporate sector. Addressing this problem requires the complementary

    efforts of policymakers, regulators, lawyers, insolvency experts, corporate

    restructuring specialists, and financiers.

    What are the roots of corporate distress? Can systemic corporate crises

    be predicted? What is the role of legal frameworks in preventing and

    coping with a crisis? What are the most effective financial techniques for

    dealing with distressed corporates? This timely volume takes an in-depth

    look at the efforts to fight corporate crisis in Indonesia, Korea, Malaysia,

    and Thailand, among others, and discusses the vital role of governments

    in securing an enabling legal system, effective out-of-court workouts,

    supportive tax regimes, and complementary policy and regulatory

    initiatives to confront systemic corporate distress.

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    ISBN 0-8213-5928-2 978-8-213-59282-6

    Edited by Michael Pomerleano

    William Shaw

    34415

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  • Mr. Michael Pomerleano Mr. Pomerleano is Lead Financial Specialist in the Financial Sector Development Department of the World Bank. He has extensive international financial consulting experience in Asia, tran- sitional economies in Eastern Europe and Central Asia. Prior to joining the World Bank, he was with the National Banking Group of Citicorp, served as Managing Partner of MBC Associates (owner-operator of commercial real estate) and worked in the Supervision and Regulation Division of the Board of Governors of the Federal Reserve System. He received his M.A. in Business Economics, a joint degree of the Harvard Business School and the Harvard Economics Department.

    Mr. William Shaw Mr. Shaw is former lead economist in the World Bank’s Development Prospects Group. Since joining the research department in 1995, he worked on various editions of Global Economic Prospects and Global Development Finance (the Bank’s annual publications on current devel- opment issues) and on debt sustainability analysis for the Heavily Indebted Poor Countries Initiative. From 1988 to 1995, he worked in the Bank’s operational departments, serving as the country economist for Tanzania, private sector development specialist for the Caribbean, and country economist for Bolivia. Before joining the Bank, Mr. Shaw worked on the administration of a food assistance program for the U.S. Department of Agriculture. Since retiring from the Bank, Mr. Shaw has served as a consultant on various issues in development economics.

  • Corporate Restructuring

    Lessons from Experience

    00-forematter2.indd i 6/9/05 9:32:12 PM

  • Corporate Restructuring

    Lessons from Experience

    Edited by

    Michael Pomerleano

    William Shaw

    00-forematter2.indd iii 6/9/05 9:32:16 PM

  • Copyright © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, N.W. Washington, D.C. 20433, USA

    All rights reserved Manufactured in the United States of America First printing March 2005

    The findings, interpretations, and conclusions expressed in this book are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they repre- sent. The World Bank does not guarantee the accuracy of the data included in this publica- tion and accepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries.

    The material in this publication is copyrighted. The World Bank encourages dissemi- nation of its work and will normally grant permission to reproduce portions of the work promptly.

    Permission to photocopy items for internal or personal use, for the internal or personal use of specific clients, or for educational classroom use is granted by the World Bank, pro- vided that the appropriate fee is paid directly to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone 978-750-8400, fax 978-750-4470. Please contact the Copyright Clearance Center before photocopying items.

    For permission to reprint individual articles or chapters, please fax a request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470.

    All other queries on rights and licenses should be addressed to the Office of the Publisher, World Bank, at the address above or faxed to 202-522-2422.

    Library of Congress Cataloging-in-Publication Data has been applied for.

    ISBN 0-8213-5928-2 978-8-213-59282-6

    Cover Design: James E. Quigley, World Bank Institute.

    Photo Credit: Malcolm Fife, Photodisc.

    00-forematter2.indd iv 6/9/05 9:32:16 PM

  • v

    Contents

    Preface xix

    Acknowledgments xxi

    Contributors xxiii

    Introduction: Toward Better Practices in Systemic Corporate Restructuring xxxi

    Michael Pomerleano

    The Government’s Role xxxii Monitoring xxxii Intervention xxxiv

    Legal Framework for Corporate Restructuring xxxvii Tax Issues xxxix Skills and Capacity xl Financial Engineering:Financial and Operational Restructuring xliii

    Asset Management Companies xliii Alternatives to Asset Management Companies xliv Use of Financial Techniques xlv

    References xlviii Notes xlix

    00-forematter2.indd v 6/9/05 9:32:16 PM

  • vi

    Corporate Restructuring: Lessons from Experience

    vi

    Chapter 1 Synopsis of Conference Papers 1

    William Shaw

    Overviews of the Crisis and General Principles 2 War Stories from the Crises 5 Technical Issues 6 Note 7

    Part I: Overviews of the Crisis Experience

    Chapter 2 Policy Approaches to Corporate Restructuring around the World: What Worked, What Failed? 11

    Stijn Claessens

    Overview of Approaches 11 Government-Sponsored Voluntary Workout Schemes 14 Court-Supervised Restructuring and Bankruptcy 19 Restructuring by Public Asset Management Companies and State-Owned Banks 24 Voluntary Workouts outside Government-Sponsored and In-Court Frameworks 32 Supporting Policy Changes 35

    Outcomes in Corporate Restructuring 41 Nonperforming Loans and Financial Indicators 41 Operational Restructuring Measures 48

    Policy Lessons 50 An Efficient Insolvency System 51 Adequate Loss-Absorption Capacity 52 A Proper Framework of Incentives 52 A Limited Role for Banks and the State 53 A Menu of Approaches 54 Corporate Governance and Other Reforms 55

    References 56 Notes 57

    00-forematter2.indd vi 6/9/05 9:32:16 PM

  • vii

    Contents

    vii

    Chapter 3 Recent International Experiences in the Use of Voluntary Workouts under Distressed Conditions 59

    Ira Lieberman, Mario Gobbo, William P. Mako, and Ruth L. Neyens

    The London Approach 61 Corporate Restructuring in Korea 65

    Initial Government Response 66 Policy Measures 67 Workout Program 69 Daewoo: “Too Big to Fail?” 74 Special-Purpose Vehicles, Restructuring Funds, and M&A Transactions 75 Strengthening the Corporate Restructuring Process within the Banks 76

    Corporate Restructuring in Turkey: The Istanbul Approach 76 Legal Framework and Structure 77 Implementation of the Istanbul Approach 79 Impediments 81

    Corporate Restructuring in Mexico 84 Poland: Decentralized Workouts Pursuant to Privatization of State-Owned Banks 86 Lessons Learned 90 References 93 Notes 95

    Chapter 4 Emerging-Market and Crisis Applications for Out-of-Court Workouts: Lessons from East Asia, 1998–2001 99

    William P. Mako

    Corporate-Financial Sector Linkages 101 Recent Approaches to Out-of-Court Workouts 104

    Korea 104 Malaysia 104 Thailand 105 Indonesia 106

    Results 107 Easy Lessons 110

    Principles and Processes 110 Legal and Regulatory Impediments 111 Capacity Constraints 113

    00-forematter2.indd vii 6/9/05 9:32:17 PM

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