Saturday July 2, 2022 marks the 25th anniversary of the float of Thailand’s currency, the baht. This event is widely regarded as triggering the Asian Economic Crisis of 1997 throughout South East Asia engulfing the economies of Thailand, South Korea, Indonesia and the Philippines.

Known as the Tom Yum Gung Crisis in Thailand, floating the currency was one of the final acts of a government which had exhausted the country’s foreign currency reserves in an ill-fated attempt to shore up the baht against waves of selling and protect a finance sector riddled with substandard loans.

At its low point in January 1998, the baht slumped to around 56 baht to the US dollar. The banking sector and most major corporations with significant foreign currency borrowings were insolvent. The International Monetary Fund coordinated a bail out which was later criticised for the austerity measures it imposed on the Thai government.

In Bangkok, one of the Mercedes-Benz dealers initiated what became known as the “Market for the Formerly Rich”. Buyers sifted through an array of luxury cars, jewellery and other boom time badges of opulence, heavily discounted to raise cash for those who had lost jobs or money on stock market investments.

A number of banks and over fifty finance companies were closed or merged with other institutions. Sales of loan portfolios and other bank assets were organised. Lehman Brothers, which itself collapsed in 2008, was heavily involved in this asset sell off.

Twenty-five years on, it may come as a surprise to learn that a number of the main banks and major conglomerates are still controlled by the same pre-1997 family groups. The ability to retain control in the face of extreme financial adversity was due to two main factors: the debtor-friendly legal system in Thailand and the tenacity and negotiation skills of these families, their executives and advisers.

In 1997, there was no formal rehabilitation procedure for companies. A rehabilitation amendment was added to the Bankruptcy Act in 1998. At the time, bankruptcy was considered an option in only a few rare cases. Insolvency was determined by a company’s historical balance sheet rather than the more realistic liquidity test. Restructurings were often completed outside the court process although, for a time, the Bank of Thailand assisted in coordinating meetings of companies and their creditors.

Companies often took an extremely hostile approach to restructuring with a number of debt standstill arrangements taking over a year to negotiate. Thai executives believed lengthy delays would allow negotiations to be finalised in a more favourable exchange rate climate. In many cases, they were correct.

In the years following the crisis, many Thai companies have taken a more conservative approach to debt, particularly unhedged foreign currency debt. They have also expanded beyond Thailand's borders with investments in neighbouring countries and further afield in places such as Australia and Europe. Part of the rationale for this diversification would be the lacklustre Thai economy, particularly in the past ten years or so as Thailand has struggled under political uncertainty and military rule.

Should the events of 1997 be revisited (and Covid-19 has certainly caused problems in certain sectors), it is doubtful that creditors would fare much better. While the rehabilitation law remains in place, debtors would once again have the upper hand in any negotiations. Directors of companies in Thailand are generally not personally liable if a company trades while insolvent. So there is little incentive for companies to use the rehabilitation procedure unless to cram down creditors. Tossing a set of the factory keys across the desk to your creditors, particularly foreign creditors, and asking them to take over the business would remain a highly effective means of retaining control and negotiating a favourable outcome.

In these circumstances, the restructuring era adage that, in practice, equity in Thailand ranks somewhere above unsecured debt and, often, above secured debt is likely to hold true once again.

July 2022

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