Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea

IMF Working Papers, October 17, 2016

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Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea

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Bibliographic details

• Authors: Jae Chung, Lev Ratnovski
• Published: October 17, 2016
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475545418.001

Method and Identification

• Introduces a method to quantify benefits and costs of corporate debt restructuring, applied to Korea.
• Suggests a "persistent ICR<1" criterion to capture firms that had ICR<1 for multiple consecutive years and thus will likely require restructuring.
• Assesses benefits by estimating the effects of removing a firm's debt overhang on its investment and hiring decisions.
• Refines assumptions on the cost of debt restructuring based on the literature, expanding focus beyond creditor losses to include the employment impact of corporate restructuring.

Key Quantitative Findings (Benchmark results for Korea)

• Creditor losses from debt restructuring: 5.5-7.5 percent of GDP.
• Employment impact from debt restructuring: 0.4-0.9 percent of the labor force.
• Compensating gains:
  • Permanent increase in future GDP growth: 0.4-0.9 percentage points.
  • Higher hiring in subsequent years: 0.05-0.1 percent of the labor force.
• Timing:
  • Corporate debt restructurings "pay off" in the medium term: their economic cost is recouped over about 10 years.

Analytical Insights

• Persistent low interest coverage (ICR<1) over multiple years is used to identify firms likely to require restructuring, linking firm-level financial distress to macroeconomic outcomes.
• The benefits channel operates through higher corporate investment and increased hiring once debt overhang is removed.
• Costs encompass both creditor losses and the direct employment effects of corporate restructuring; both are explicitly incorporated in the estimates.

Policy Implications

• Debt restructuring can be economically justified at the aggregate level because medium-term benefits (higher investment, higher growth, and higher hiring) can offset initial creditor losses and employment dislocation.
• Policymakers should account for both creditor balance-sheet losses and labor-market impacts when designing and timing corporate debt restructuring programs.
• Monitoring persistent ICR<1 firms can help target restructuring needs and estimate aggregate fiscal and labor-market consequences.

Source: Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea — Jae Chung and Lev Ratnovski (IMF Working Paper No. 2016/204).

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