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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek

MARCH 31, 2000 VOL. 26 NO. 12

The Game Is Up
A Bangkok court has ruled that Thai Petrochemical is bankrupt -- evidence that the cozy ways of business are out
By TIM HEALY and JULIAN GEARING Bangkok


Yvan Cohen for Asiaweek
Prachai thought he didn't have to repay loans, but a court said otherwise

Less than 10 weeks before the Thai baht buckled under speculative attack in July 1997, Prachai Leopairatana pronounced confidently that his company, Thai Petrochemical Industry (TPI), was moving ahead with plans for a 300,000-barrel refinery in Thailand. He also said there were serious ongoing discussions about making iron pellets in India, steel in Thailand and various petrochemical products in China and Australia. The memory of those heady days must seem hazy now. Recently, Prachai's company completed a dizzying 33-month descent from industrial giant to bankrupt archetype.

It is a measure of the changes in Thailand that the insolvency of the nation's ninth-largest company by sales is a reason for optimism - at least among investors, lenders and anyone who believes Thailand needs a reliable bankruptcy system. "The decision of the court sends a very strong message to debtors," says Corona Lim, an analyst for HSBC Securities Asia in Hong Kong. "If you don't come to the table and negotiate we will take you to court and the court will not necessarily back the debtor."

 
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Such a message would never have been sent before the Crisis. But today the TPI court ruling, in which Prachai lost control of his company, is a confirmation that the nation is coming to grips with a legion of loan defaulters. "The data are compelling that the process of sorting out debt problems is being done a lot more willingly [throughout Thailand] than the press on TPI would suggest," says Donaldson Hartman, deputy head of research at Salomon Smith Barney in Bangkok. Thousands of cases in which local banks are taking debtors to court are underway, he says, which is amazing compared with the mere handful that would have been brought to book not long ago.

The new central bankruptcy court in Bangkok, established last June to foster a system in which judges could become expert in a dense and difficult area of business jurisprudence, has now seen more than 400 filings. Sixteen judges are assigned to handle the caseload. Before TPI, Alphatec Electronics was the highest-profile bankruptcy in Thailand. It went under in 1998. What sets TPI apart is the size of its debt - $3.5 billion - and the aggressiveness with which Prachai tried to fend off 148 foreign and domestic creditors, led by Bangkok Bank.
The primary question going forward is this: How will international investors and lenders perceive the progress of Thailand's reform? Bangkok's SET stock index has languished over the last nine months, falling almost 25% from the middle of 1999 while most of the region has soared. That is partly because of a growing feeling among investors that reforms have taken place in word, but not in deed. The case of Prachai's company, which is a large, traditional, family-run concern, may change that.

TPI was started by Prachai 20 years ago. It grew out of a group of businesses begun by his grandfather shortly after World War II. That history and the loss of face for Prachai personally explains why he did not suffer the ignominy of bankruptcy lightly. For more than two years he fought the creditors. The company actually stopped making payments in August 1997. Prachai made a show of announcing he would not pay, placing TPI squarely in the category of what came to be called "strategic NPLs [non-performing loans]." He maintained that the company had the ability to pay but would not because he didn't believe Thai borrowers should bear the brunt of the weeks-old depreciation of the baht, which made dollar loans so expensive to service. At one point in early 1998, a dollar loan would have required more than twice as many baht to service as it had seven months earlier.

As time dragged on, some Thai borrowers simply became deadbeats - they didn't even pay when they were able. Thai banks, already reeling, fell further. A year ago the banks reported that nearly half of their loans were non-performing, meaning they hadn't been serviced for at least three months. New bank lending all but stopped, and even worthy companies were starved for capital. The June legislation aimed to turn the situation around, but the high-profile Prachai seemed to thumb his nose at the law. He repeatedly promised to negotiate a debt-workout plan with creditors but always backed away at the last minute complaining that the lenders were demanding too much.

"Prachai didn't cooperate at all," alleges one foreign banking analyst. "He was hostile and belligerent." Once creditors tired of the stalling, they tried the new bankruptcy court. The case hinged on whether TPI was actually insolvent. Prachai argued that his company's assets exceeded liabilities by $749 million at the end of September 1999. But the court rejected this accounting because it had not been certified by independent auditors. And in the end, Prachai's refusal to pay came back to bite him; the court cited the failure of TPI to service its debt as evidence of its insolvency, and ordered the company be taken from him. Within four to eight weeks, creditors will vote to decide who will plan and execute a sweeping debt restructuring. The favorite for the job is Effective Planners, a subsidiary of Ferrier Hodson, which was proposed by principle creditor Bangkok Bank.

In hindsight, the entire episode, says Lim, "was very atypical of Thailand. I don't think you will see other cases as contentious as this one." The HSBC Securities analyst adds: "I am surprised it got so hostile. One would have expected a meeting of minds earlier." The TPI case doesn't mean that the job is done. Restructuring non-performing loans is not the same as collecting the money. "There is still a lot more to be done to reduce NPLs to manageable levels," says Chatumongkol Sonakul, Thailand's central bank governor. And if the workouts aren't effective, he adds ominously, "there is the problem of new NPLs arising." Still, forcing debtors to either pay what they can or give up their businesses to someone else is a powerful tool. Effective bankruptcy procedures can help get banks healthy enough to resume lending. Prachai had been betting that Thailand hadn't actually changed so much. Fortunately, it seems he was wrong.

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