## Introduction and Motivation

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---

### Crisis context and transmission channels
- Pressures from the global economic crisis and tighter credit conditions generated corporate debt problems worldwide, driven by high debt service costs, un-hedged foreign currency risk, and roll-over problems.
- Corporate debt problems created multiple, interacting complications:
  - Reduced ability of stressed corporates to meet working capital needs, weakening capacity to service existing debt and further balance-sheet deterioration.
  - Slowdown of activity contributing to unemployment and social pressures.
  - Increase in nonperforming loans (NPLs) that endanger weakened banking systems and reduce banks’ ability to extend credit, slowing the recovery and creating a self-perpetuating debt over-hang.
  - Government rescue efforts typically entail direct fiscal costs and increase contingent fiscal risk due to moral hazard.
- Empirical indicators:
  - In some countries and regions, NPLs doubled in 2009 compared to 2008.
  - Banking asset write-downs continued to be significant and growing in 2010 compared to 2009.
  - Reporting from United States, U.K., and euro area shows that as much as 17 to 23 percent of writedowns in 2007–10 comprises commercial mortgage and corporate loans.

### Scope, leverage, and fiscal implications
- Country coverage: Latvia, Russian Federation, Spain, United Arab Emirates (Dubai), Ukraine, and the United States.
- Observations:
  - Wide-scale corporate debt restructuring akin to the Asian crisis has so far been avoided; corporate sectors were less leveraged prior to 2008 compared to 1997 (with the exception of Spain and Russia).
  - Corporate debt problems tend to lag a crisis by one to two years; accelerating NPL growth may make further state interventions likely.
  - The cost of corporate sector bailouts in some sample countries rivals those of financial sector bailouts, heightening sovereign risk and bringing debt sustainability considerations forward.

*Source — _wp10260 - Introduction and Motivation*

### Objectives and modalities of corporate debt restructuring
- Primary objective: timely and orderly restructuring of corporate liabilities to restore operations and financial viability.
- Types of restructuring actions:
  - Rescheduling of repayment.
  - Change in interest rate.
  - Change in currency denomination of the debt.
  - Reducing principal of the debt.
- Key trade-offs:
  - Flow rescheduling can provide breathing room without reducing NPV.
  - When restructuring reduces NPV, creditors face risks of breaching regulatory norms, creditor bankruptcy, or forced mergers.

### When and how governments should intervene
- Weak rationale for government involvement when troubled corporations are few and the financial system is sound.
- Government involvement may be warranted when:
  - Debt problems are widespread with sizable macroeconomic consequences.
  - Market failures inhibit debt workouts at required scale.
- Government roles:
  1. Provide appropriate legal foundations.
  2. Mediation and incentives for out-of-court resolutions.
  3. Direct financing.
  4. Facilitation of restructuring (e.g., Asset Management Companies).
- Large-scale workouts may require insolvency law overhaul and enforcement mechanism improvements.
- Example: the informal “London Approach” principles — (i) minimizing losses to creditors; (ii) avoiding liquidation of viable debtors; (iii) continuing financial support to viable debtors in out-of-court restructuring agreements.

### Asset Management Companies (AMCs) — functions and design lessons
- Functions:
  - Buy bad loans, provide equity to banks and corporations, convert debt to equity, develop secondary debt markets.
- Institutional options: private, public, or hybrid AMCs.
- Conditions favoring AMC effectiveness:
  - Large number of troubled corporations.
  - Loans relatively homogeneous.
  - AMCs bring restructuring expertise unavailable in banks.
  - Openness to international technical expertise.
- Risks and safeguards for government-sponsored AMCs:
  - Governance challenges, political interference, potential distortion of property rights, loss of private information.
  - Recommended safeguards: clear sunset clauses; temporary, transparent special legal powers with proper oversight and judicial review.
- Crisis experience:
  - AMCs were widely used in the Asian crisis (Indonesia, Malaysia, Korea, Thailand) and Mexico (1995–97).
  - In the current crisis, reliance on AMCs has been limited; many countries reformed insolvency law or extended direct loans/recapitalizations to state-owned enterprises.
- Recent country programs mentioned:
  - Ireland: National Asset Management Agency (property development loans).
  - Germany: special purpose vehicles and “bad bank” public entities.
  - Iceland: legislation enabling a government-sponsored AMC for nationally significant firms.
  - United States: Public Private Investment Program to remove distressed assets from bank balance sheets.
  - Announced programs in Australia, Canada, Japan; U.K. Asset Protection Scheme as a guarantee scheme.

*Source — Box 1. Types of AMCs*

### Strategy design and tailoring considerations
- A properly designed strategy generally should:
  - Make best use of limited fiscal resources.
  - Target interventions where most needed.
  - Leverage market-based solutions and private resources.
  - Bolster credit enforcement and insolvency laws.
  - Preserve credit culture.
- Key factors to attend to:
  (i) policy coordination; (ii) analysis of data to assess debt problem dimensions; (iii) reform of legal and institutional enforcement frameworks; (iv) facilitation of out-of-court restructurings; (v) facilitation of voluntary standstills; (vi) identifying rationale for government financing; (vii) different treatment for SMEs; (viii) coordination with financial sector restructuring.

### Banks’ role, incentives, and government measures to support restructuring
- Priorities and constraints:
  - Banking sector rehabilitation is key for corporate debt crisis containment.
  - Banks must re-establish loss-absorption capacity before engaging in workouts.
  - Initial crises drain bank capital; weakened banks may curtail lending to viable firms.
- Coordination and strategic behavior:
  - Weak banks can prolong restructurings; strategic default and asset grabbing risks exist.
  - Dispersed claim holding and presence of non-bank financial institutions complicate creditor coordination.
- Government measures to promote restructuring:
  - Bank recapitalization and liquidity provision.
  - Conditional public recapitalization tied to progress in corporate debt restructuring.
  - Support for specialized advisory and investment banking services to facilitate negotiations.
  - Tax and financial incentives to expedite out-of-court restructurings.
  - Use supervisory powers to require banks to disclose claims to relevant negotiating parties.
  - Enforcement of NPL classification and regulatory guidelines to strengthen participation incentives.
  - Clear timetables for debt workout stages with potential supervisory penalties for non-compliance.
  - Avoid targeting foreign creditors to preserve international credit and investment access.

*Source — Box 1. Types of AMCs*

### Box 2. Debt Restructuring in Russia

### Macro and corporate debt context
- Corporate troubles intensified in the second half of 2008 after declining oil prices and ruble depreciation.
- Capital outflows reached $131 billion in the fourth quarter.
- Corporate NPLs doubled between September 2008 and March 2009 and were expected to continue to grow.
- Corporate debt more than doubled in two years, reaching a peak of $276 billion in September 2008.
- Share of foreign currency denominated debt remained high at around 80 percent of total debt.

### Central Bank and VEB interventions
- Central Bank of Russia (CBR) interventions resulted in foreign reserves dropping by more than US$200bn between their peak in August 2008 and early-2009.
- VneshEconomBank (VEB) support program:
  - VEB extended foreign currency loans for refinancing indebtedness owed to foreign creditors prior to September 25, 2008.
  - Loans ranged from $100 million to $4.5 billion carrying an interest rate of at least at LIBOR+5 percent.
  - By end-2008, volume of loans extended for refinancing indebtedness owed to foreign creditors reached $9.8 billion; total reached $14.3 billion by June 2010.
  - Selected allocations: Rusal received $4.5 billion secured against a 25 percent stake in Norilsk Nickel; Alfa Group received $2 billion against its 44 percent stake in Vimpelcom; Rosneft received $800 million; PIK received $262 million.
  - By end April 2010, $1 billion of loans for small and medium-sized enterprises had been disbursed by VEB.

### Fiscal and legislative measures
- Corporate tax rate reduced from 24 percent to 20 percent in early-2009.
- Tax rate on small enterprises reduced from 15 percent to 5 percent.
- Insolvency legislation amended twice (in 2008 and 2009) to encourage reorganization and use of insolvency procedures by debtors and unsecured creditors.
- Financing sources for operations drawn from the National Wealth Fund (NWF) and CBR reserves; VEB received $50 billion of CBR reserves for on-lending, with more NWF funds placed on term deposit with VEB.

*Source — Box 2. Debt Restructuring in Russia*

### Country case highlights and fiscal magnitudes

### Latvia — NPLs, restructuring practices, and fiscal impact
- NPLs: "3.6 percent to 15 percent of total loans, almost equally distributed between the household and corporate sector."
- Restructuring practices: grace periods on principal, capitalization of interest, extending loan maturities.
- Losses created by restructuring methods: about "5 percent of GDP."
- Banking system dependence: largest foreign banks account for around "55 percent of bank assets."
- Bank recapitalization estimated costs:
  - "4 percent of GDP in 2008"
  - "7–8 percent of GDP each year until 2012 (IMF, 2010a)"
- Gross corporate FX exposure: "64 percent of GDP."
- Policy measures: market-based corporate-debt restructuring with insolvency law improvements and incentives for out-of-court restructuring; August 2009 guidelines and parliamentary amendments to Insolvency Law; public communication campaign launched July 2009.

### Emirate of Dubai — Dubai World shock and support measures
- Economic engines affected in 2009: oil sector, logistics/business services, property development.
- Dubai World (DW) announced a standstill and restructuring in November 2009; investors had treated DW borrowing (via Nakheel) as quasi-sovereign.
- Banking/central bank measures in 2008: lowered interest rates and new liquidity facilities (wider collateral, dollar swaps).
- Federal measures: deposit insurance, "3-year guarantee on non-deposit liabilities," and a recapitalization scheme providing "AED 50 billion (or $13.6 billion)" as deposits in the banking system.
- Central bank subscribed to a "$10 billion bond" issued by the government of Dubai in early 2009.
- NPL ratio: from "2.5 percent in June 2008" to "4.6 percent in November 2009 (Box 1; IMF, 2010c)."
- Support to banks for DW obligations: a new loan of "$10 billion from Abu Dhabi to Dubai" to pay a Nakheel bond due in December 2009.
- Legal response: decree establishing a special insolvency regime and special tribunal for DW and subsidiaries.

### Dubai World and Nakheel restructuring details
- DW restructuring covers financial debt of "$24.9" (units implied in source).
  - "$14.4 billion is owed to some 90 banks abroad and in U.A.E.;" balance owed to government of Dubai.
  - "$4.4 billion tranche" with "5 year maturity and 1 percent interest."
  - "$10.0 billion tranche" with "8 year maturity, 1 percent interest paid each year, an additional payment of 1.5 to 2.5 percent upon maturity, and a shortfall guarantee by the Government of Dubai between $1 and 4 billion."
  - Government conversion of its claims ("$10.5 billion") into equity; DFSF committed up to "$1.5 billion" for working capital and interest.
- Nakheel plan (May 2010):
  - Government (through DFSF) to provide "$8 billion new equity to Nakheel (subject to a successful restructuring)" and convert "$1.2 billion debt into equity."
  - Trade creditors and suppliers to be paid with "40 percent and 60 percent of cash and publicly traded security with 10 percent annual interest rate, respectively."
  - Remaining Nakheel bonds to be paid off in full and on time.
- Support vehicle and fiscal exposure:
  - Dubai Financial Support Fund (DFSF) funded by a "$20 billion bond program."
  - Total cost to the central bank and Government of Abu Dhabi for support of Dubai would be about "$20 billion."
  - Announced additional support: government to provide "$9.5 billion of new funds to DW and Nakheel" in addition to "$11 billion made available previously" and conversion of about "$20 billion of government claims" to equity.

### United States — Auto industry bailout and outcomes
- Industry impact:
  - Sales dropped by "18 percent between 2007 and 2008," with SUV sales plunging about "40 percent."
  - The Big Three accounted for almost "50 percent of sales in the United States in 2008" and directly employed "240,000 workers (CRS, 2009)."
  - The industry overall employs around "500,000 workers"; in Michigan it represents one third of all manufacturing employment.
  - Canada-U.S. auto trade: "20 percent of total bilateral trade in 2007."
  - Auto industry in Canada: "14 percent of the country’s manufacturing output," employs "150,000 workers."
- Policy timeline and assistance:
  - September 2008: Big Three applied for "$50 billion."
  - November 2008: bill for up to "$25 billion" introduced but not passed.
  - December 19, 2008: President Bush approved "$17.4 billion" from TARP for GM ("$13.4 billion") and Chrysler ("$4 billion").
  - Additional TARP loans: "$5 billion under the TARP for General Motors Acceptance Corporation (GMAC)" and "$1.5 billion for Chrysler Financial."
  - Total provided since December 2008: about "$81 billion ($67 billion net as of October 2010)" in loans and equity investments to the two stressed auto manufacturers and GMAC.
  - Canada and Ontario provided "$2.4 billion" to support Chrysler Canada and offered "$9.5 billion" to support GM.
- Bankruptcy and restructuring outcomes:
  - Chrysler filed for Chapter 11 on April 30, 2009; case completed June 10, 2009.
  - General Motors filed for Chapter 11 on June 1, 2009; completed on July 10, 2009.
  - Ford did not use government loans; undertook out-of-court restructuring and raised equity via share sale in May 2009.

*Source — Excerpt from IMF staff paper (content unit _wp10260)*

### Box 6. U.S. Car Industry — financial assistance and ownership outcomes

### Federal assistance and ownership stakes
- U.S. government investment and assistance:
  - U.S. government invested a total of US$49.5 billion under the TARP.
  - GM received aid totaling $60 billion from the U.S. and Canadian governments.
  - GM repaid the $8.1 billion direct loan portion of the $60 billion aid.
  - Repayment of the remainder depends on a public share offering likely by end -2010.
- GM post-restructuring ownership:
  - U.S. Treasury: 61 percent.
  - United Auto Workers Union: 17.5 percent.
  - Canada Development Investment Corporation: 7.9 percent.
  - Government of Ontario: 3.8 percent.
  - Bond holders of the Motors Liquidation Company: 9.8 percent.

### Operational and fiscal implications
- GM returned to profitability in the first quarter of 2010 with net earnings of $865 million.
- On October 28, 2010 the Treasury announced it accepted an offer by GM to repurchase $2.1 billion of Series A preferred stock, conditioned on the closing of the proposed initial public offering of GM's common stock.
- Chrysler posted losses in 2009 but was expected to break even in 2010; a portion of its loan matures in December 2011, with the balance due in June 2017.
- Broader federal assistance in 2009 included "Cash for Clunkers," dealer financing and warranty protection, supplier assistance, and support for alternative fuels and advanced technology vehicles.
- Fiscal exposure implications:
  - Prospects for recouping federal costs depend on companies’ operational restructuring and financial performance.
  - Government interventions avoided large-scale corporate insolvencies and stabilized expectations but created moral hazard risks and direct and indirect costs to taxpayers.
  - The value of government investments remains uncertain until assistance is unwound.

*Source — Box 6. U.S. Car Industry, IMF working paper content unit.*

*Source — _wp10260 - Introduction and Motivation*

### Introduction and Motivation ............................................................................................

### Introduction and Motivation

### Crisis context and transmission channels
- Pressures from the global economic crisis and tighter credit conditions generated corporate debt problems worldwide, driven by high debt service costs, un-hedged foreign currency risk, and roll-over problems.
- Corporate debt problems created multiple, interacting complications:
  - Reduced ability of stressed corporates to meet working capital needs, leading to weaker capacity to service existing debt and further balance-sheet deterioration.
  - Slowdown of activity contributing to unemployment and social pressures.
  - Increase in nonperforming loans (NPLs) that endanger weakened banking systems and reduce banks’ ability to extend credit, slowing the recovery and creating a self-perpetuating debt over-hang (corporations cannot deleverage because of recession; recession is prolonged by high debt).
  - Government rescue efforts typically entail direct fiscal costs and increase contingent fiscal risk due to moral hazard.
- Nonperforming loans of household and corporate sectors showed an increasing trend following the start of the crisis; in some countries and regions, NPLs doubled in 2009 compared to 2008 (Figure 1, panels 2 and 3).
- Banking asset write-downs continued to be significant and growing in 2010 compared to 2009 (Figure 1, panel 1).
- Reporting from United States, U.K., and euro area shows that as much as 17 to 23 percent of writedowns in 2007–10 comprises commercial mortgage and corporate loans.

### Scope of the paper and country coverage
- The paper surveys recent corporate debt restructuring episodes in: Latvia, Russian Federation, Spain, United Arab Emirates (Dubai), Ukraine, and the United States.
- Countries used a mix of direct (budget-to-corporates) and indirect (budget-to-banks-to-corporates) assistance; many reformed legal, tax, and regulatory frameworks to enable speedy and orderly restructuring.

### Comparative leverage and potential for wider restructuring
- Wide-scale corporate debt restructuring akin to the Asian crisis has so far been avoided; one potential reason is that corporate sectors across countries were less leveraged prior to 2008 compared to 1997.
- With the exception of Spain and Russia, leverage ratios across countries declined since the Asian crisis (Figure 2).
- Corporate debt problems tend to lag a crisis by one to two years as crisis effects filter through the economy and protracted recession reduces corporations’ ability to service debt; accelerating NPL growth may make further state interventions likely.

### Fiscal and sovereign risk implications
- The cost of corporate sector bailouts in some sample countries rivals those of financial sector bailouts (see Appendix).
- Such costs have heightened sovereign risk and brought debt sustainability considerations forward, underscoring the need to monitor government balance-sheet risks stemming from the corporate sector and to plan contingencies.

---

### Rationale for and Modalities of Corporate Debt Restructuring

### Objectives and instruments of restructuring
- Objective: timely and orderly restructuring of corporate liabilities to restore operations and financial viability.
- Types of restructuring actions:
  - Rescheduling of repayment
  - Change in interest rate
  - Change in currency denomination of the debt
  - Reducing principal of the debt
- Restructuring may or may not change the present value of debt; flow rescheduling can provide breathing room without reducing NPV.
- When restructuring reduces NPV of debt, creditors face risks: breach of regulatory norms, creditor bankruptcy, or forced mergers.

### When government involvement is warranted
- Weak rationale for government involvement when troubled corporations are few, macroeconomic importance is limited, and financial system is sound.
- Government involvement may be warranted when:
  - Debt problems are widespread with sizable macroeconomic consequences,
  - Market failures inhibit debt workouts at required scale.
- Government involvement entails weighing direct fiscal costs against the need for speedy restructuring and potential indirect economic costs from action or inaction.

### Roles governments can play
- Governments typically provide:
  1. Appropriate legal foundations.
  2. Mediation and incentives for out-of-court resolutions.
  3. Direct financing.
  4. Facilitation of restructuring (e.g., Asset Management Companies).
- Large-scale workouts may require insolvency law overhaul and enforcement mechanism improvements.
- Government mediation is useful when courts or administrative systems are weak or market failures/legal impediments inhibit coordinated bank-led restructuring — exemplified by the informal “London approach.”
  - The “London Approach” principles: (i) minimizing losses to creditors; (ii) avoiding liquidation of viable debtors; (iii) continuing financial support to viable debtors in out-of-court restructuring agreements. The approach was implemented in over 160 cases during 1987–97 in the U.K., with the Bank of England acting as a broker.

### Direct financial assistance and indirect support
- Direct assistance: compensation to creditors for lengthening maturities, guarantees for corporate loans, direct lending to viable firms unable to access markets.
- Indirect assistance: bank recapitalization and liquidity provision when corporate distress deteriorates bank balance sheets and credit provision — examples include Chile (1981–83), Mexico (1995–97), Poland (1993), and more recently Russia, Ukraine, and Dubai.

### Asset Management Companies (AMCs)
- AMCs can spearhead corporate debt restructuring, maximize recovery of viable firms, and support banking sector viability (Box 1).
- AMCs can be private, public, or public-private; they can buy bad loans, provide equity to banks and corporations, convert debt to equity, and develop secondary debt markets.
- AMCs enjoyed economies of scale in debt restructuring and were prevalent during the Asian crisis (Indonesia, Malaysia, Korea, Thailand) and in Mexico during 1995–97.
- The paper notes the contrast with the Asian crisis where AMCs were widely used; in the current sample, AMCs were less widely used and many countries instead reformed insolvency law or extended direct loans/recapitalizations to state-owned enterprises.

### Lessons from past wide-scale restructurings
- Country experiences have been mixed and often lengthy and difficult.
- A properly designed strategy generally should:
  - Make best use of limited fiscal resources,
  - Target interventions where most needed,
  - Leverage market-based solutions and private resources,
  - Bolster credit enforcement and insolvency laws,
  - Preserve credit culture.

### Tailoring strategies — key factors to consider
- A corporate debt restructuring strategy should attend to:
  (i) policy coordination;
  (ii) analysis of data to assess the dimensions of the debt problem;
  (iii) reform of the legal and institutional framework for enforcement of credit, particularly corporate insolvency law;
  (iv) facilitation of out-of-court restructurings;
  (v) facilitation of voluntary standstills;
  (vi) identifying the rationale for government financing;
  (vii) consideration of different treatment for SMEs; and
  (viii) coordination with financial sector restructuring, particularly with respect to banks.

---

### The Role of the Banking Sector in Restructuring

### Priorities and constraints
- Rehabilitation of the banking sector is a key priority for corporate debt crisis containment and resolution, even though multiple creditor types may be involved.
- Banks must first support their own viability and establish loss-absorption capacity before engaging in corporate debt workouts.
- The initial wave of crises drains bank capital; combined with many creditors needing restructuring, this may lead banks to curtail lending (to viable and non-viable firms), exacerbating the crisis.

### Feedback effects and strategic behavior
- Weak banking sectors can prolong corporate debt restructuring: weaker banks reduce incentives for corporations to negotiate since corporations may prefer dealing with failed banks (strategic defaulters can emerge).
- Lack of bank strength and coordination can inhibit timely workouts and contribute to attrition problems in voluntary loan workouts, where delays are individually optimal but socially costly.

### Empirical and historical support
- Evidence: Franks and Sussman (2005) show bank weakness prolongs restructurings in U.K. bank-corporate workouts.
- Lessons from Mexico and other crises indicate similar dynamics (Krueger and Tornell (1999)).

---

*Italic line: Source — _wp10260 - Introduction and Motivation*

### Box 1. Types of AMCs

### Box 1. Types of AMCs

### Institutional structures and choice criteria
- AMCs could be government-sponsored, private, or hybrid.
- Choice of structure depends on: types of assets, magnitude of the problem, depth of markets, and characteristics of debtors.

### Government-sponsored AMCs: strengths, weaknesses, and safeguards
- Strengths and appropriate uses:
  - Relatively stronger case when the size of the debt restructuring problem is acute relative to private sector capacity or when special legal powers are needed to promote debt restructuring.
  - May enhance the AMC’s ability to resolve debt disputes quickly.
- Weaknesses and risks:
  - Mixed experience due to difficulty balancing conflicting public and market objectives.
  - Governance challenges: ensuring independence of operations, freedom from political interference, and accountability for performance.
  - Use of special legal powers can be politically contentious and may distort the system of property rights.
  - Private information about the borrower may be lost or difficult to transfer when assets are moved to a government-run AMC.
- Recommended safeguards:
  - Subject operations to clear sunset clauses.
  - If special legal powers are granted, they should be temporary, fully transparent, and subject to proper oversight and mechanisms for judicial review.

### Private and hybrid AMCs
- Private AMCs:
  - Compensation structures aligned to maximizing value in recovered assets tend to execute functions more efficiently.
  - Funding can be constrained during or following crises.
  - In some cases, close collaboration with financial regulators or government is beneficial (e.g., when creditor bank is under resolution or debtor is a large strategic company).
- Hybrid public-private AMCs:
  - Can leverage both public and private resources and expertise.
  - Provide an innovative approach to asset management by combining strengths of both sectors.

### Effectiveness in corporate debt restructuring
- AMCs have been relatively more effective when:
  - There are a large number of troubled corporations.
  - Loans are relatively homogeneous.
  - AMCs bring specific restructuring expertise unavailable in banks.
  - Openness to leveraging international technical expertise bolsters local experience.
- Comparative lesson:
  - Some country cases suggest success where acquired assets were mostly real-estate related, assets formed a small fraction of the banking system, and AMCs maintained independence from political pressures.

### Experience in the current crisis and related programs
- Thus far in the current crisis, reliance on AMCs has been limited.
- Broader asset management programs established in some countries include:
  - Programs directed to removing distressed assets out of bank balance sheets.
  - Programs guaranteeing high quality assets to support bank liquidity.
- Examples of recent country actions (as noted in the source):
  - Ireland established the National Asset Management Agency, primarily dedicated to property development loans.
  - Germany established special purpose vehicles to take on illiquid structured assets and “bad bank” public entities.
  - Iceland enacted legislation enabling establishment of a government-sponsored AMC to support restructuring of nationally significant firms.
  - Public Private Investment Program in the United States is an example of removing distressed assets from bank balance sheets.
  - Announced asset management programs in Australia, Canada, and Japan; U.K. Asset Protection Scheme is a guarantee scheme targeting losses on risky assets.

### Banks’ incentives, coordination problems, and government roles
- Banks generally prefer market-based debt restructuring to avoid costly and slow court-based bankruptcy procedures.
- In systemic crises, bank incentives alone may be insufficient for speedy and efficient corporate debt restructuring due to coordination failures and externalities.
- Ownership concentration effects:
  - Dispersed claim holding makes it harder for borrowers to negotiate and may lead to asset grabbing and creditor runs.
  - Concentrated claim holding may lead banks to liquidate prematurely, sacrificing going-concern value to recover loan value.
- Presence of non-bank financial institutions (e.g., hedge funds) with differing incentives can complicate creditor coordination.
- Government intervention is commonly required to secure resources and institutional arrangements for negotiating parties.
- Bank recapitalization using public funds has been a common feature to restore depleted capital and allow banks to take longer-term decisions on debt restructuring.
  - In some cases, injection of public funds was conditional upon banks’ progress in corporate debt restructuring.

### Additional government measures to promote bank and corporate debt restructuring
- Government support for setting up specialized advisory and investment banking services to facilitate negotiations between banks and corporations and minimize coordination problems.
- Offering tax and other financial incentives to banks (including to AMCs) to expedite out-of-court debt restructuring.
- Enhance transparency by using supervisory powers to require banks to disclose claims to relevant negotiating parties to speed up debt negotiations.
- Ensure enforcement of existing NPL classification and other regulatory guidelines to strengthen banks’ incentives to participate in debt restructuring.
- Define a clear and concise timetable for stages of the debt workout process; supervisory penalties for non-compliance could be imposed to achieve maximum participation and minimum disruption.
- Avoid strategies that intentionally target foreign creditors, as they can negatively affect access to international credit and investment; foreign participation can, in some circumstances, support restructuring by enhancing resources and technical expertise.

### Illustrative Russian Federation experience (selected points)
- Corporate sector troubles began in the second half of 2008 after declining oil prices and ruble depreciation.
- Capital outflows reached $131 billion in the fourth quarter.
- Corporate NPLs doubled between September 2008 and March 2009 and were expected to continue to grow.
- Corporate debt:
  - Had more than doubled in two years, reaching a peak of $276 billion in September 2008.
  - Throughout this growth, the share of foreign currency denominated debt had consistently remained high at around 80 percent of total debt.
- Central Bank of Russia (CBR) interventions:
  - Interventions resulted in foreign reserves dropping by more than US$200bn between their peak in August 2008 and early-2009.
- VneshEconomBank (VEB) support program:
  - VEB extended foreign currency loans for refinancing indebtedness owed to foreign creditors prior to September 25, 2008.
  - Loans ranged from $100 million to $4.5 billion carrying an interest rate of at least at LIBOR+5 percent.
  - By end-2008, volume of loans extended for refinancing indebtedness owed to foreign creditors reached $9.8 billion.
  - Total reached $14.3 billion by June 2010.
  - Selected allocations: Rusal received $4.5 billion secured against a 25 percent stake in Norilsk Nickel; Alfa Group received $2 billion against its 44 percent stake in Vimpelcom; Rosneft received $800 million; PIK received $262 million.
  - By end April 2010, $1 billion of loans for small and medium-sized enterprises had been disbursed by VEB.
- Broader fiscal and legislative measures:
  - Corporate tax rate reduced from 24 percent to 20 percent in early-2009.
  - Tax rate on small enterprises reduced from 15 percent to 5 percent.
  - Insolvency legislation amended (twice, in 2008 and again in 2009) to encourage reorganization and use of insolvency procedures by debtors and unsecured creditors.

*Source: Box 1. Types of AMCs (from the provided IMF content unit).*

### Box 2. Debt Restructuring in Russia

### Box 2. Debt Restructuring in Russia

### AvtoVAZ: restructuring actions, support measures, and conditions
- Context and problem:
  - Sales fell from 730,000 cars in 2008 to an estimated 340,000 in 2009.
  - Credit used to finance the purchase of about half of all new cars had disappeared as Russian banks’ access to wholesale markets dried up.
  - Unable to service its debt of approximately $2 billion, management initiated restructuring actions in summer 2009 and offered several scenarios to creditors.
  - In September (2009), talks with main creditors Sberbank and VEB on possible debt to equity swaps were unsuccessful.
- Government and shareholder intervention (November–December 2009):
  - Renault (25 percent stake) announced provision of €300 million ($424 million) to AvtoVAZ via in-kind transfers of technology and manufacturing equipment.
  - The Russian government agreed to increase its financial support (direct and indirect) by RUB 50 billion ($1.67 billion).
  - At end-December, RUB 28 billion ($938 million) was injected into Rostekhnologii as additional capital to be on-lent to AvtoVAZ as an interest-free loan which would later be converted to a larger equity stake.
  - Proceeds of the loan intended to help AvtoVAZ meet obligations to its banks.
- Conditions placed on support and restructuring:
  - Loan to be issued only after AvtoVAZ provided the Ministry of Industry and Trade, the Ministry of Economic Development, and the Finance Ministry with an acceptable medium-term business development plan, including a prospective investment program.
  - Conditions included signing a mutually-acceptable debt restructuring memorandum between Rostekhnologii, AvtoVAZ, and a group of creditor banks (including Sberbank and VTB).
  - An agreement was reached in April 2010.

### PIK Group: standstill, restructuring plan, and state-supported financing
- Initial distress and standstill request:
  - In April 2009, PIK Group requested a 4-month standstill on its debt of about RUB 40 billion ($1.34 billion).
  - The company had posted a $1.1 billion loss in 2008.
  - Key creditors—largely Russian banks—agreed to the standstill.
- Restructuring objectives and financing outcomes:
  - Restructuring plan aimed at replacing most short-term debt with maturities extending over 5 years.
  - As part of the plan, the company sought an additional $500 million to complete projects.
  - Reached a restructuring agreement with key creditors in December 2009.
  - Obtained a 12-month loan of $262 million from VEB to help refinance maturing debt.
  - Obtained state-guarantees to borrow $400 million from Sberbank.

### Financing sources and broader fiscal context (as referenced in the box)
- Resources for these operations were drawn from the National Wealth Fund (NWF) as well as CBR reserves, largely a product of past oil export revenues.
- Specifically, VEB received $50 billion of CBR reserves for on-lending, with more funds from the NWF being placed on term deposit with VEB.

*Source: Box 2. Debt Restructuring in Russia, _wp10260 - Box 2. Debt Restructuring in Russia*

### 3.6 percent to 15 percent of total loans, almost equally distributed between the household and

### _wp10260 - 3.6 percent to 15 percent of total loans, almost equally distributed between the household and

### Latvia — Nonperforming loans, restructuring, and fiscal costs
- Findings
  - Nonperforming loans (NPLs) amount to "3.6 percent to 15 percent of total loans, almost equally distributed between the household and corporate sector."
  - Restructuring practices include offering borrowers grace periods on principal payments, capitalization of interest, and extending loan maturities.
  - These restructuring methods have created losses of about "5 percent of GDP."
  - Banks are often reluctant to write off principal due to impacts on their capital and due to tax disincentives.
  - For residential loans that cannot be restructured, banks have started to lease back properties to previous owners rather than selling collateral in the current environment.
  - Gross corporate FX exposure is "64 percent of GDP," with only a limited subset of corporates naturally hedged through FX assets or export revenue.
  - If a devaluation occurs, debt servicing would become increasingly difficult; conversely, if the peg holds, an overvalued currency combined with deep and prolonged recession would also depress debt servicing capacity.

- Policy response and fiscal impact
  - Bank recapitalization plans were implemented; estimated costs were:
    - "4 percent of GDP in 2008"
    - "7–8 percent of GDP each year until 2012 (IMF, 2010a)"
  - The banking system’s stability depends upon the continued involvement of the largest foreign banks that account for around "55 percent of bank assets."
  - Corporate-debt restructuring approach: market-based with government facilitation via insolvency law improvements and incentives for out-of-court restructuring.
  - August 2009: a committee including the Ministry of Justice issued guidelines for out-of-court restructuring in line with international standards.
  - Parliament approved amendments to the Insolvency Law and other credit enforcement laws to streamline liquidation, support rehabilitation of debtors, and facilitate speedy debt resolution.
  - A public campaign was launched in July 2009 to communicate these changes to relevant stakeholders.
  - Despite reforms, with gradual increase of NPLs, government fiscal involvement in corporate restructuring may be unavoidable.

### Emirate of Dubai — Shock from Dubai World and broader policy measures
- Background and transmission
  - Dubai's three engines of growth affected in 2009: oil sector, logistics/business services, and property development.
  - November 2009: Dubai World (DW), a government-related enterprise (GRE), announced it was seeking a standstill and restructuring of part of its debt, highlighting risks from large real estate investments.
  - Investors had treated DW borrowing, particularly via Nakheel, as quasi-sovereign; spreads on Nakheel bonds increased significantly after the standstill and clarification that Nakheel bonds did not have an explicit government guarantee.

- Policy response
  - 2008 central bank actions: lowered interest rates and deployed new liquidity support facilities (e.g., wider range of collateral, dollar swaps).
  - Federal government measures included a deposit insurance scheme, a "3-year guarantee on non-deposit liabilities," and a large recapitalization scheme providing "AED 50 billion (or $13.6 billion)" as deposits in the banking system.
  - Early 2009: the central bank subscribed to a "$10 billion bond" issued by the government of Dubai.
  - The ratio of NPLs almost doubled from "2.5 percent in June 2008" to "4.6 percent in November 2009 (Box 1; IMF, 2010c)."
  - Policy response to the DW standstill: assurances that the central bank would stand behind banks and a new loan of "$10 billion from Abu Dhabi to Dubai" to pay a large Nakheel bond due in December 2009.
  - Corporate restructuring initially limited to DW holding company and its Nakheel subsidiary; healthy subsidiaries were later excluded from restructuring.

- Legal and institutional measures
  - Ruler of Dubai issued a decree establishing a special insolvency regime and special tribunal to facilitate reorganization and debt restructuring of DW and its subsidiaries.
  - Rationale: DW was not a normal U.A.E. company subject to federal or DIFC insolvency frameworks; unified regime intended to minimize application of different insolvency frameworks.

### Dubai World and Nakheel — Restructuring details (Box 5)
- Timeline and process
  - March 25, 2010: DW and Nakheel submitted restructuring proposals to creditors.
  - October 27, 2010: Dubai World announced complete support of its creditors.
  - Nakheel was still progressing towards its target participation rate; restructuring expected to complete by end-2010 and Nakheel to be separated from Dubai World to become a direct holding of the government of Dubai.

- Dubai World Holding plan highlights
  - The restructuring covers financial debt of "$24.9" (units implied in source).
  - Of this, "$14.4 billion is owed to some 90 banks abroad and in U.A.E.," with the balance owed to the government of Dubai.
  - The "$14.4 billion debt" is divided into:
    - A "$4.4 billion tranche" with a "5 year maturity and 1 percent interest."
    - A "$10.0 billion tranche" with "8 year maturity, 1 percent interest paid each year, an additional payment of 1.5 to 2.5 percent upon maturity, and a shortfall guarantee by the Government of Dubai between $1 and 4 billion."
  - Proposed conversion by government of Dubai (through DFSF) of its share of claims ("$10.5 billion") into equity.
  - DFSF committed to providing new funds up to "$1.5 billion" to Dubai World for working capital and interest payments.

- Nakheel plan highlights
  - Under the plan announced in May 2010:
    - Government (through DFSF) to provide "$8 billion new equity to Nakheel (subject to a successful restructuring)" and convert its existing "$1.2 billion debt into equity."
    - New funds mainly to complete existing projects.
    - Customers with long-term project down payments can swap into near-completing projects, receive a credit towards land/property during a "5-year period," or take cash (without accrued interest) at the end of the period.
    - Trade creditors and suppliers to be paid with a combination of "40 percent and 60 percent of cash and publicly traded security with 10 percent annual interest rate, respectively."
    - Remaining Nakheel bonds to be paid off in full and on time.
    - Remaining bank creditors to receive principal and accrued interest through maturity extension at commercial rates.
    - Payments to trade creditors began disbursing in September and discussions with banks were underway.

- Support vehicle and fiscal exposure
  - Dubai Financial Support Fund (DFSF) set up in early-2009, funded by a "$20 billion bond program."
  - Bonds were purchased by the central bank (early 2009), and the Government of Abu Dhabi and the banks it controls (late 2009).
  - Total cost to the central bank and the Government of Abu Dhabi for support of Dubai would be about "$20 billion."
  - Announced additional support under restructuring: government to provide "$9.5 billion of new funds to DW and Nakheel" in addition to "$11 billion made available previously" and conversion of about "$20 billion of government claims" to equity.

### United States — Auto industry bailout and restructuring
- Background
  - Automotive industry in U.S. and Canada faced severe distress; sales dropped by "18 percent between 2007 and 2008," with SUV sales plunging about "40 percent."
  - The Big Three (General Motors, Chrysler, and Ford) accounted for almost "50 percent of sales in the United States in 2008" and directly employed "240,000 workers (CRS, 2009)."
  - The industry overall employs around "500,000 workers" across the country; in Michigan it represents one third of all manufacturing employment.
  - Canada-U.S. auto trade represented "20 percent of total bilateral trade in 2007."
  - The auto industry in Canada represents "14 percent of the country’s manufacturing output" and employs "150,000 workers."

- Policy response and financial assistance
  - September 2008: Big Three applied for "$50 billion" to pay for health care expenses and avoid bankruptcy.
  - November 2008: bill for up to "$25 billion" in direct loans introduced but did not pass the Senate.
  - December 19, 2008: President Bush approved "$17.4 billion" in emergency bailout funds from TARP for GM ("$13.4 billion") and Chrysler ("$4 billion"), subject to oversight conditions.
  - Additional loans: "$5 billion under the TARP for General Motors Acceptance Corporation (GMAC)" and "$1.5 billion for Chrysler Financial."
  - A Task Force formed in February 2009 reviewed restructuring plans and on March 30, 2010 assessed that submitted plans were not sufficient to put companies on a viability path and that the government would work with Congress on further actions.
  - Ultimately, both Chrysler and General Motors filed for bankruptcy (details in Box 6).

- Fiscal magnitude
  - Since December 2008, the U.S. government provided about "$81 billion ($67 billion net as of October 2010)" in loans and equity investments to the two stressed auto manufacturers and GMAC.
  - Governments of Canada and Ontario provided "$2.4 billion" to support the restructuring of Chrysler Canada and offered "$9.5 billion" to support GM.

*Source: Excerpt from IMF staff paper (content unit _wp10260).*

### Box 6. U.S. Car Industry

### Box 6. U.S. Car Industry

### Crisis timeline and restructuring actions
- Chrysler filed for Chapter 11 bankruptcy protections on April 30, 2009. The case was completed on June 10, 2009, with the United Auto Workers’ retirees’ medical trust and Fiat owning major shares in the reorganized Chrysler, and the United States and Canadian governments retaining small stakes.
- General Motors filed for Chapter 11 bankruptcy proceedings on June 1, 2009, which were completed on July 10, 2009.
- Ford did not avail itself of government loans; it undertook an out-of-court debt restructuring and labor negotiations and raised equity through a share sale in May 2009.

### Financial assistance and ownership outcomes
- U.S. government investment and assistance:
  - U.S. government invested a total of US$49.5 billion under the TARP.
  - GM received aid totaling $60 billion in aid from the U.S. and Canadian governments.
  - GM repaid the $8.1 billion direct loan portion of the $60 billion aid.
  - Repayment of the remainder depends on a public share offering which is likely to take place by end -2010.
- GM ownership structure after restructuring:
  - U.S. Treasury: 61 percent
  - United Auto Workers Union: 17.5 percent
  - Canada Development Investment Corporation: 7.9 percent
  - Government of Ontario: 3.8 percent
  - Bond holders of the Motors Liquidation Company: 9.8 percent

### Operational and financial outcomes (company-level)
- GM:
  - Returned to profitability in the first quarter of 2010 for the first time in three years, with net earnings of $865 million.
  - On October 28, 2010 the Treasury announced that it has accepted an offer by General Motors to repurchase its $2.1 billion of Series A preferred stock, conditioned on the closing of the proposed initial public offering of GM's common stock. (Source citation retained in original text.)
- Chrysler:
  - Posted losses in 2009 but is expected to break even in 2010.
  - A portion of its loan matures in December 2011, with the balance due in June 2017.

### Other forms of federal assistance in 2009
- Direct and indirect assistance beyond loans and equity investments included:
  - "Cash for Clunkers" program
  - Dealer financing and warranty protection
  - Supplier assistance
  - Financial support for alternative fuels and advanced technology vehicles

### Implications for fiscal exposure and recovery
- The prospects for recouping federal costs depend on the success of companies’ operational restructuring and financial performance.
- Government interventions helped avoid large-scale corporate insolvencies, provided confidence to markets, and stabilized expectations, but they also:
  - Created moral hazard risks.
  - Came at direct and indirect cost to taxpayers.
  - Weakened governments’ balance sheets by accepting assets of questionable financial value in exchange for new resources that had alternative uses in crisis times.
- Where the value of government investment depends on company performance going forward, the extent of fiscal losses/gains will remain uncertain until assistance is unwound.

*Source: Box 6. U.S. Car Industry, IMF working paper content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10260.pdf_