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

October 17, 2016

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Format: Chicago

Jae Chung, and Lev Ratnovski. Benefits and Costs of Corporate Debt Restructuring: An Estimation for Korea, (USA: International Monetary Fund, 2016) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper offers a method to quantify benefits and costs of corporate debt restructuring, with an application to Korea. We suggest a "persistent ICR<1" criterion to capture firms that had ICR<1 for multiple consecutive years and thus will likely require restructuring. We assess the benefits of debt restructuring by estimating the effects of removing a firm's debt overhang on its investment and hiring decisions. We refine the assumptions on the cost of debt restructuring based on the literature, and focus not only on creditor losses, but also on the employment impact of corporate restructuring. Benchmark results for Korea suggest 5.5-7.5 percent of GDP creditor losses and a 0.4-0.9 percent of the labor force employment impact from the debt restructuring. These are compensated by a permanent 0.4-0.9 percentage points increase in future GDP growth thanks to higher corporate investment and 0.05-0.1 percent of labor force higher hiring in the subsequent years. The key qualitative result is that corporate debt restructurings "pay off" in the medium term: their economic cost is recouped over about 10 years.

Subject: Asset and liability management, Debt burden, Debt restructuring, Economic sectors, Employment, External debt, Labor, Labor force, Manufacturing

Keywords: Corporate Debt, Cost-benefit assessment, Cost-benefits implication, Creditor loss, Debt burden, Debt overhang, Debt Restructuring, Debt vulnerability, Employment, Employment impact, Global, Korea, Labor force, Manufacturing, Stress-tests, Vulnerabilities in Korea, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/204
Stock No:

WPIEA2016204
ISBN:

9781475545418
ISSN:

1018-5941

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