THE WORLD BANK CONFERENCE ON

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THE WORLD BANK CONFERENCE ONCORPORATE
RESTRUCTURINGINTERNATIONAL BEST
PRACTICESTHE ROLE AND PROGRESS OF

• Pengurusan Danaharta Nasional Berhad
• Malaysia

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OVERVIEW OF ASSET MANAGEMENT COMPANIES (AMCs)
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• IN A SITUATION OF ECONOMIC AND FINANCIAL CRISIS,
  BANKS DISTRACTED BY NPL MANAGEMENT MAY NOT BE
  ABLE TO FOCUS ON ITS CORE ACTIVITIES - FINANCIAL
  INTERMEDIATION MAY BREAK DOWN.
• Different banking landscape - one borrower, many
  bankers
• Slow pace - recovery efforts dependent on
  existing bankruptcy and foreclosure laws
• Banks have no special powers
• Moral hazard - are banks willing to write-off
  loan losses?
• THEREFORE, AMCs ARE THE SOLUTION
• TO THE NPL PROBLEM

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ASSET MANAGEMENT COMPANIES (AMCs)

• A catch-all phrase to describe organisations
  established to acquire NPLs from financial
  institutions with the objective of recovering
  value from resolution or disposal
• Most AMCs are specifically designed to suit
  national situation, thus the organisation needs
  to be practical and solution-oriented
• Usually set up in answer to collapse of banking
  institutions or because of threat of banking
  system collapse e.g. RTC, Securum
• AMCs, together with recapitalisation agency, can
  contribute to banking sector restructuring

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THE AMC CONTINUUM
Types of AMCs
Warehouse Agency
Asset Management Company
Rapid Disposition Agency

• Rapid disposition agencies are most effective
  when there is a large pool of NPL investors,
  large numbers of accounts and a quick disposition
  is required
• A true AMC performs best when the number of
  accounts are manageable, when the NPLs are
  structural in nature, and the AMC has the
  wherewithal to resolve NPLs

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ADVANTAGES OF AMCs

• Removes NPL distraction from banking system
• Minimise side effects on the economy
• Holistic, organised and focussed approach towards
  NPL resolution
• NPL resolution vs. relationship banking - breaks
  corporate-bank links
• Valuation - fair market vs book value
• Special powers
• Economies of scale - disposal, management

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IN SUMMARY

• AMCs are a potent force in dealing with NPLs,
  provided they suit the national situation,
• be practical and solution-oriented, and
• take steps to enhance their operating environment
• HOWEVER
• AMCs must be made a finite-life organisation and
• not allowed to perpetuate itself
• to avoid moral hazard issues...

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MALAYSIASBANKING SECTOR RESTRUCTURING PLAN
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COMPREHENSIVE BANKING RESTRUCTURING PLAN
OBJECTIVES
Short-term
Medium/Long-term

• Prevent a banking crisis
• Encourage FIs to continue to lend
• Enhance market efficiency
• Support economic recovery

• Create a resilient banking system
• Develop an efficient competitive banking sector
• Broaden deepen financial markets and strengthen
  financial infrastructure

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COMPLEMENTARY ROLES
CDRC
Facilitate restructuring where necessary
Restructure debt
DANAHARTA
Rehabilitate
BORROWERS
Sell NPLs
Bonds
New loans
New lloans/
SPECIAL FUNDS
BANK
Restructure distressed loans
Cash
Inject Capital
Bonds
DANAMODAL
Coordination of activities undertaken by
a Steering Committee in Bank Negara Malaysia
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DANAHARTAROLE ORGANISATION
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THE AMC CONTINUUM
Types of AMCs
Warehouse Agency
Asset Management Company
Rapid Disposition Agency

• Neither a rapid disposition agency nor a
  warehouse agency - DANAHARTA is an NPL RESOLUTION
  AGENCY
• Need to manage logistics and allow for
  case-by-case resolution
• The number of accounts gtRM5 million is small
  (approximately 3,000 accounts)

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• DANAHARTAS OBJECTIVES
• Remove non-performing loan (NPL) distractions
• Maximise recovery value of acquired assets
• FUNDAMENTAL PRINCIPLES
• System-wide carve-out of NPLs
• Market driven approach
• True asset management company

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DANAHARTAS PROGRESS THROUGH PHASES
Management
Acquisition
Establishment

• Objectives
• Organisation
• Funding
• Legislation
• Disclosure
• Programmes
• Professional
• Advisers

• Targets
• Guidelines
• Methodology
• Valuation

• Approach
• Loan Management
• - restructuring
• - working
• capital support
• Asset Management
• - rationalisation
• - foreclosure
• - operations
• funding support

onwards
June 98
Sept 98
June 99
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GOVERNANCE
Ministry of Finance
Oversight Committee
Board of Directors
Executive Committee
Audit Committee
Remuneration Committee
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CORPORATE INFORMATION

• Danaharta was incorporated on 20 June 1998 as a
  limited liability corporation owned by
  Government.
• The independent Board and management of Danaharta
  are responsible and accountable for its
  operations
• Chairman (non-executive)
• Dato Zainal Abidin Putih, Chairman of the
  Malaysian Accounting Standards Board (MASB)
• Managing Director
• Dato Zukri Samat, former Director of
  Operations, Danaharta
• Three non-executive Directors from the Malaysian
  community
• Dato N. Sadasivan, former Director-General of
  Malaysian Industrial Development Authority
• Dato Abdul Hamidy Hafiz, President/CEO, Affin
  Bank Berhad
• Dato Abd. Wahab Maskan, Group CEO, Kumpulan
  Guthrie Berhad
• Two non-executive Directors from the
  international community
• Mr David Moir, non-executive Director of Standard
  Chartered Bank plc
• Mr Alister Maitland, former Managing Director and
  Director of ANZ Banking Group

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THE DANAHARTA ACT 1998

• Main principles
• Ability to acquire NPLs
• Ability to manage
• Ability to foreclose (National Land Code)

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THE DANAHARTA ACT 1998

• Ability to acquire NPLs
• Statutory vesting process
• Steps into the shoes of the selling institution
• Clear title -vs- clean title
• Third party claims preserved

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THE DANAHARTA ACT 1998

• Ability to manage NPLs
• Special Administrators are appointed with consent
  of Oversight Committee
• 12-month moratorium on claims
• SA takes over control and management of company
• SA workout proposal reviewed by Independent
  Adviser
• Approval by secured creditors

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APPOINTMENT OF SPECIAL ADMINISTRATORS

• Appointment of SAs can be made only if Danaharta
  is satisfied that -
• Borrower is unable or is likely to be unable to
  pay its debts
• The survival of the Borrower as a going concern
  is threatened or
• A formal restructuring of the debts of the
  Borrower would be more advantageous than a
  winding-up.
• All appointments of SAs must be approved by the
  Oversight Committee

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THE APPROACH TO THE APPOINTMENT OF SAs
SAs
Takes Control Issues Notices
Affected Person
SAs Appointed Reviews Financials Assesses
Viability
Proposal

• Further injection of capital
• White Knight

• Valuations
• Compensation

Consolidation Value Maximization
Business Continues on Restructured Balance Sheet
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SPECIAL ADMINISTRATORS APPOINTED

• As at 18 February 2004, Danaharta had appointed
  SAs across 72 groups (123 companies) of
  companies, with 33 groups of companies still at
  various stages of special administration.
  There are 6 stages of Special Administration
• No. of Companies
• 1) SAs discharged 80
• 2) Workout proposal implemented, SAs pending
  discharge 12
• 3) Workout proposal approved by authorities,
  being implemented 16
• 4) Workout proposal submitted to authorities,
  awaiting approval 0
• 5) Workout proposal approved by secured
  creditors, pending
• submission to authorities 0
• 6) Special Administrators appointed, pending
  preparation of
• workout proposal 15

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THE DANAHARTA ACT 1998

• Ability to foreclose on property collateral
• (15th Schedule of National Land Code)
• Protection of property
• Foreclosure through private treaty sale
• Need to give 30 days notice to borrowers
• Bypass court auction process
• Transparent and market-driven process

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TRANSPARENCY AND DISCLOSURE

• Committed to transparency in its operations
• Disclosure via
• publication of business plan / guidelines
• half yearly operational reports
• frequent media and analyst updates, e.g. press
  releases
• parliamentary replies
• annual reports / special reports
• announcements required under the Danaharta Act,
  e.g. public notices on the appointments of
  Special Administrators and Independent Advisors
• active website

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ACQUISITION PHASE
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MECHANISMS

• NPL gt RM5 million (gross value)
• Market value determined by professional valuers
• Secured loans are valued according to collateral
  value
• Unsecured loans are acquired at 10 of
  outstanding loan
• Profit sharing - 20 (Danaharta) 80 (FI)

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ACQUISITION APPROACH PAYMENT FOR NPLs

• FIs receive bonds as consideration for the
  purchase of
• NPLs except non-BAFIA FIs and Islamic facilities
  which
• require cash
• Characteristics of the bonds
• - Government-guaranteed zero risk weighted
• - Tenure of 5 years, renewable for up to
  another 5 years
• - Zero coupon
• - Price (Malaysian Govt. Securities as
  benchmark) tradable issued over time
• Benefits of bonds
• - provides income
• - improves Capital Adequacy Ratio
• - provides liquidity

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MANAGEMENT PHASE
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MANAGEMENT APPROACH
NPLs
Loan Management
Asset Management
VIABLE LOANS
NON-VIABLE LOANS
FOREIGN LOAN ASSETS

• ASSET RESTRUCTURING
• Sale of collateral
• foreclosure
• RM
• liquidation
• Sale of Business
• SA
• via BID PROCESS

Recovery
Recovery

• Management of Assets
• property
• business
• VALUE ENHANCEMENT

Management of Securities VALUE ENHANCEMENT
S A L E T O M A R K E T
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LOAN MANAGEMENT- Loan Restructuring

• Viable loans are restructured using Danahartas
  published Loan Restructuring Principles and
  Guidelines
• Guidelines based on following objectives
• to maximise the overall recovery value and return
  to Danaharta
• to minimise the involvement of taxpayers money
• to ensure fair treatment of all stakeholders
• to utilise where appropriate Danahartas special
  powers to leverage and benefit the banking system
  as a whole

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Loan Restructuring Principles

• Shareholders take a proportionately larger
  haircut than creditors
• Fair treatment to secured and unsecured creditors
• No dilution of inadequate security
• Only one opportunity given
• Make borrowers work for lenders

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LOAN MANAGEMENT- Asset Restructuring

• Involves sale of business or collateral
• Apply principles of competitive bidding,
  preservation and enhancement of value of business
  or collateral
• Orderly disposition through transparent process

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PROGRESS OF DANAHARTA
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TIMELINE
Receive share capital from Government
Issue Government- guaranteed bonds
June 1998 - March 2000
Acquire NPLs
Receive NPLs to be managed
Sep 1998 - Dec 2001
NPL Portfolio
Nov 1998 - Sep 2002
Determine recovery strategies
Implement recovery strategies
Receive non-cash assets - securities, properties
and restructured loans
Receive cash
1999 - 2005
Convert to cash/ residual assets
Cash/ residual assets
Distribute to Government/ surplus recovery to
respective financial institutions
End 2000 - 2005
31 Dec 2003 - 31 March 2005
Redeem bonds. Any shortfall will be borne by
Government
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NPL PORTFOLIO
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DANAHARTAS EXPECTED RECOVERY RATE
Soft approach (viable loans)
Hard approach (non-viable loans)
Acquired NPLs 49
Managed NPLs 66
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ANALYSIS OF RECOVERY PROCEEDSBY ASSET GROUP (as
at 31 December 2003)
Expected recovery does not include interest
or adjustments due to gains or losses arising
from the recovery process. Default rate is 3.2
Note RM1 USD0.263
767 borrowers have fully settled RM14.58 bil
(LRA) of NPLs, relating to 881 accounts
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ANALYSIS OF THE CONVERSION OFNON-CASH ASSETS
RECEIVED as at 31 December 2003
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ANALYSIS OF RECOVERY PROCEEDSTotal cash received
as at 31 December 2003

• RM billion
• Cash from recovery proceeds 16.16
• Adjustments
• Comprised primarily interest received
• on restructured loans and gains or
• losses from sale of foreclosed property
• and securities collateral 2.88
• TOTAL CASH RECEIVED (as at 31 December 2003)
  19.04

Note RM1 USD0.263
Acquired loans RM6.08 bil
Managed loans RM12.96 bil
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DISTRIBUTION OFRECOVERY PROCEEDS as at 31
December 2003
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SUMMARY OF CASH STATEMENTas at 31 December 2003
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STATUS OF DANAHARTA BONDSas at 31 December 2003
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(6) NPL resolution, not NPL disposal
(1) International precedents
(5) Clear thought-out process
(2) Legal powers under the
Danaharta Act 1998
Factors which aid Danahartas progress
(4) Private sector driven
(3) Concentrate on larger sized NPLs
(2,000-3,000 accounts)
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Information on Danaharta can be found at
www.danaharta.com.my