DEBT RESTRUCTURING – WHAT ARE THE OPTIONS? | OUTLOOK August 2021
The COVID-19 pandemic and the impact on the global economy have placed unprecedented pressure on businesses around the world, including Thailand.
The pandemic has pushed millions of small Thai companies into a crisis mode.
“Millions of operators are suffering. If the situation is prolonged to the end of the year the nation will be in crisis, with 80% of us going bankrupt.”
Sangchai Theerakulwanich, chairman of the Federation of Thai SME
This means that many Thai businesses will continue to face acute financial pressure with short-term liquidity, access to finance, and debt repayment.
DEBT RESTRUCTURING – WHAT ARE THE OPTIONS?
Different debt restructurings are suitable for different financial situations.
There are two things to consider, the amount of “payments” and “time” involved.
8 debt restructurings typically involve one or more of the following approaches:
1. Debt rescheduling
Extending repayment periods.
This is commonly used to help the burden of repayment in accordance with decreasing income, such as a 10-year loan with six years paid off and four years remaining, but the borrower can no longer pay back the installments.
Typically, a borrower can request the lender to extend the pay-back period to reduce the amount of each monthly installment.
Advice: Financial institutions may consider the borrower’s payment timeline.
2. Suspension of principal payment
This reduces the burden of temporary installments. Usually, the installment payment consists of two parts, which are the principal and interest.
First of all, we must understand that the repayment of the loan in each installment consists of principal and interest, so “principal suspension” means that we do not have to pay principal, but still have to pay interest (the amount of principal and interest depends on the total debt, type of debt, loan period and interest rates).
Advice: Financial institutions may consider suspending principal payments for 3–6 months. When the financial situation is better, the debtor may bring a lump sum to repay the debt before the contractual due date.
This will reduce the burden of interest expenses and the debt will be discharged faster. In the past, BOT has campaigned to improve prepayment for more fair treatment.
3. Reduce interest rates
Lowering loan interest rates causing the monthly installments to be divided to reduce the principal more and when the principal is reduced, the interest burden will also be reduced, for example, we borrow with an interest rate of MOR+2% per annum, which under dire economic conditions becomes impossible to repay at this same interest rate.
If this is the case then the borrower can apply for a lower interest rate on the loan.
Advice: Does the financial institution consider giving a discount? Look at many factors such as costs of financial institutions, history of repayment of debtors. Loan type and collateral, etc.
4. Waive interest on default
At the beginning of 2020, the BOT announced that financial institutions will only charge interest based on the actual amount subject to the default rather than the whole amount of the loan and to pay more attention to the debtor’s ability to repay the debt in a fairer and more concrete manner.
Advice: Financial institutions can adjust the interest rate, but this must not be an unreasonable burden for the debtor or be the cause of a high debt burden so that it cannot be paid later and become bad debt.
5. Increase working capital
In a situation where future events are highly uncertain, Working Capital (WC) is a key factor to support a business during difficult times.
To have a chance to recover quickly, the BOT, therefore, encourages financial institutions to grant new WC loans to any potential businesses by separating this WC loan classification from other loans that may already be non-performing (NPLs) so that the company still has a normal status loan account.
Advice: Borrowers should prepare reasons and estimates of expenses that will occur in the next 6-12 months, such as employee wages, cost of purchasing raw materials for production and other operating expenses such as electricity, water, office rent, etc. for financial institutions to use in considering the credit limit.
Financial institutions will consider the payment history, for example, over the past one year and if the debtor has repaid both the principal and interest and how much is the amount of WC requested for the additional amount relative to the total debt burden amongst other things.
6. Change the debt type
Debt with high interest rates should be reclassified to debt with lower interest rates, for example, SMEs borrowers use credit cards and cash cards as working capital sources with high interest rates of 18% and 28%, or debtors with a full O/D credit line.
Advice: Financial institutions may consider switching from these high interest revolving loans to a term loan with lower interest.
7. Cancel the loan with a lump sum payment (haircut)
Many people may call this method a haircut.
If a borrower has enough sources of liquid assets as well as some earnings perhaps or ability to borrow elsewhere (perhaps from relatives) and they have not quite enough to settle the outstanding debt and interest, then the borrower can negotiate a discount so that it’s enough to close the loan.
Advice: Financial institutions may require payment to be completed in a short period of six months, or in just one or two installments.
However, it is difficult to negotiate a settlement with a discount in the event that the collateral is higher than the debt balance or additional potential collateral exists that could be used.
8. Refinance by new lenders
This is the process of closing credit from existing creditors and moving to new creditors with better terms, such as lower interest rates. By bringing new debts to pay off the existing debts that were outstanding before Thailand may already be familiar with refinancing home and business loans with some level of collateral.
Advice: Refinancing may sound good but we also need to think about the various costs that may arise from changing creditors, such as mortgage collateral. Collateral Valuation Expenses, new insurance and penalty to the former creditor that we pay back the full amount before the due date specified in the contract which must be calculated well if it is worth the lower interest rate or not.
3 CHECKPOINTS THAT SME’S SHOULD KNOW BEFORE RESTRUCTURING DEBT
1. Review of future business prospects
Before debt restructuring, the first thing entrepreneurs need to look out for is the future of their business. Is there still a way to survive?
It may be time for entrepreneurs to go out of business and look for new opportunities instead. But if the business can still go on with debt restructuring and wait for the cash flow of the business to return, it is a solution that will help the business to keep going.
2. Check cash flow
Cash flow is a very good indicator. Does the business need to restructure its debt? If the business has insufficient working capital. Entrepreneurs have to look at why the cash flow is not enough and need to look at these two aspects together:
- Cash inflows that come in or not? If the income is too low, what should be done to increase the income?
- Cash outflow expenditure is too much? or remains the same, does not decrease?
Both are the reasons why businesses are illiquidity and unable to pay their debts. It is imperative that entrepreneurs should talk and negotiate with the bank to find a solution together.
3. Use appropriate debt restructuring options
- The term extension is like a Debt Holiday, which means no principal and interest payments are required. But this way, the interest will accumulate over time.
- Extension of term in the form of interest only, installments principal payable later.
- Changing the loan type to get a lower interest rate.
These options are debt restructuring which the purpose is to help the cash outflow of the business decreases or make it in line with the cash flow received in the current situation itself. What kind of debt restructuring is suitable for SMEs? It may have to consider on a case-by-case basis in order to find a form of restructuring that is suitable for that business.
MEASUREMENT TO HELP SME’s FROM BANK OF THAILAND (BOT)
If you are running an SME in Thailand and suffering with the financial crisis during this time then there is a source of funds available through the BOT and you can ask for a loan via a project called “DR BIZ”.
“DR BIZ” PROJECT
It is a project created by the collaboration of the banking sector to assist the debtors with multiple creditors and affected by economic situations such as covid-19 outbreaks, trade wars and natural disasters to receive financial assistance through the process of mutual agreement between the banks. This makes negotiation to resolve the debt with a faster resolution and help the businesses that are important for employment to continue their business.
Qualifications of Candidate
There are 2 or more creditors of banks which are commercial banks or specialised financial institutions.
All types of businesses (both juristic persons and individuals) and all industries are economically affected, but still have the potential to conduct business or pay the debt.
No bad debts (no overdue more than 90 days) with at least one creditor. Also, the existing bad debt must not be occurred before January 1, 2019.
Not being sued by a creditor unless the creditor agrees to withdraw the case.
Enrollment
The bank advises the candidate to participate in the program.
The candidate enrolls in the program through the BOT’s website https://www.bot.or.th/app/drbiz
Processing Time
1. The candidate enrolls through one of the above channels.
2. The bank will get back to you within 5 business days.
3. The candidate submits additional documents as specified the bank.
4. Creditor banks will jointly consider ways to assist and inform the candidate of the results, including signing debt restructuring agreements within 1 month.
Project Duration
Enrolled by 31 December 2021
Benefits of Participating
- It allows to contact the creditors from any banks at once to reduce communication processes and provide quick resolution (One Stop Service).
- It relieves financial burdens and helps the debtors continue their business without becoming a bad debt.
- It is a channel to access new loans.
Rights, Benefits and Fee Waivers
- Reduce transfer fees and collateral mortgages to 0.01%
- Exempted income tax, VAT, specific business tax, stamp duty for income earned from debt restructuring.
Expenses
- There are no application fees.
- During debt repayment in accordance with the agreement of the debt restructuring agreement, the bank will not charge interest at default or charge any additional fees, penalty fees or other expenses.
- There is no early repayment allowance.
However, in the event of actual costs of restructuring the debt, such as the cost of the collateral appraiser, the debtor may be liable to that cost.
TAX INCENTIVE ON DEBT RESTRUCTURING
Tax Exemptions for Debt Restructuring Royal Decree issued under the Revenue Code on Tax Exemption (Issue No. 709)
Tax exemptions to support debtors and guarantors, financial institutions, and other creditors participating in debt restructuring went into force on July 13th, 2020. The incentives are similar to those implemented after the 2011 floods.
Only activities carried out between January 1st,2020 and December 31st,2021 are eligible for the exemptions, and must be executed in accordance with BOT’s regulations for debt restructuring.
Both financial institutions and the debtors of financial institutions are exempt from personal income tax, corporate income tax, VAT, special business tax, and stamp duty. The exemptions are granted for the amount of income received from the transfer of assets, the sale of goods, the provision of services, and stamps attached to instruments executed as a result of debt restructuring.
Other creditors (such as credit card issuers and personal loan businesses) and the debtors of other creditors receive the same benefits. Additionally, debtors of other creditors will receive exemptions from income tax for the amount of debt forgiven by the creditor.
Debtors of financial institutions and debtors of other creditors receive exemptions from income tax, VAT, special business tax, and stamp duty imposed on transfers of immovable property under the following circumstances:
- The income must derive from the transfer of property, mortgaged by the debtor to guarantee the loan, to a party that is not the creditor.
- The debtor must use the income received from the transfer of property to repay their qualifying debts to the creditor.
- The exemption will apply to income up to the amount of the outstanding debt owed to the creditor or obligations under the debt guarantee agreement, in accordance with conditions announced by the Director-General.
MBMG GROUP, practice has extensive experience in debt-restructuring businesses, and management on local and multi-jurisdictional debt settlements and restructuring.
SMEs which want to get insight about
- Financial health-check to identify eligibility for restructuring
- Advice on instruments to be used in financial restructuring
- Drafting financial restructuring plan
- Advice on options for debt settlement
- Debt-into-equity conversion
- Support with implementing other options,
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Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
