* * 1~~~~~~ 9931 Viewpoirff Note No. 200 November PM How to Accelerate Corporate and Financial Sector Restructuring in East Asia Stijn Claessens, Resolving systemic banking and corporate distress is not easy. The large scale of the East Asian Simeon financial crisis has made the task even more daunting in Indonesia, the Republic of Korea, Malaysia, Djaznkov, and Daniela and Thailand (figure 1). Two years into the process, bank and corporate restructuring is still a work in Klinlgebiel progress (Claessens, Djankov, and Klingebiel 1999). Governments should act to accelerate it. Besides adopting common policy reforms-improving financial regulation and supervision, corporate governance, and bankruptcy procedures-and shoring up banks' capital positions, governments could take or facilitate three additional steps: FIGURE 1 THE EAST ASIAN CRISIS-LARGER THAN MANY Set up competitive, privately managed specialized funds, to hold nonperforming loans Indonesia and depoliticize restructuring. Allow auctions as Korea. Rep. of an alternative to negotiations, to speed debt I restructuring. And allow employee ownership Malaysia participation schemes, to reduce workers' Thailand resistance to changes in ownership. This Note Argentina, 190-82 Private sector claims reviews current approaches to financial * Nonperforming loans restructuring and explains the proposed Chile, 1981-83_ Chile,_1981- Fiscal cost of crisis mechanisms for accelerating the process. Mexico, 1995-present Finland, 1991-94 Although governments have spent substantial Finland, 1991-94 - -sums to clean up balance sheets, banks remrain inadequately capitalized in all four countries Japan, 1992-present V: (table 1). While Korean and Malaysian banks may be able to cover their capital shortfall fiom Sweden, 1990-93 k retained earnings in a reasonable time, that is not 0 50 100 150 200 250 the case for banks in Indonesia and Thailand. But even in Korea and Malaysia letting banks fend for Percentage of GDP themselves will be risky. Self-recapitalization Source. Ciaessens, Djankov, and Klingebiel 1999. makes banks less willing to absorb losses and so hinders corporatc rcstructuring. Because cap:.tal- constrained banks shift assets into governrrent The World Bank Group * Finance, Private Sector, and Infrastructure Network 2 How to Accelerate Corporate and Financial Sector Restructuring in East Asia TABLE 1 FINANCIAL DISTRESS, STATE OWNERSHIP, AND THE PUBLIC DEBT BURDEN Percent Current nonperforming loans in banks as a share of all financial assets (1999) 34.1 15.9 17.9 27.9 Large, distressed corporations restructured out of court (as of August 1999) 17 48a 32 29 Capital shortfall in banks as a share of GDP (1999) 12.7 10.7 5.5 15.4 Firms with debt servicing problems (2001, projected)b 52.9 17.2 13.8 22.3 Public debt (including financial restructuring costs) as a share of GDP (1999) 98.3 37 48 39.3 Interest payments on public debt as a share of fiscal revenue (1999) 91.8 14 6.5 6.5 Fiscal costs of crisis as a share of GDP (1998)c 50 26.5 16.4 32.8 a. Excludes companies affiliated with the five largest chaebol. Such companies are restructured through a separate mechanism. Including them would significantly reduce the share of restructured firms. b. Firms that cannot cover their interest payments from operating cash flows. The projection is based on actual mid-1999 corporate performance data and International Monetary Fund macroecDnomic forecasts as of August 1999. c. Includes the fiscal cost of recapitalization and the expected extra fiscal costs. Source: Claessens, Djankovt and Klingebiel 1999. securities, it also limits corporate lending and FIGURE 2 STATE OWNERSHIP HAS RISEN SHARPLY thus impedes economic recovery. And an under- capitalized financial sector can inspire banks to State-controlled financial assets as a percentage of GDP finance risky but potentially high-return projects 150 End-1996 in attempts to restore their capital. U August 1999 While corporate restructuring has accelerated, 120 corporate distress remains high and many cor- porations are unlikely to grow out of their prob- lems. Moreover, much financial restructuring appears cosmetic, with restrtctured loans often 90 reverting to nonperforming status. Even though operational corporate restructuring will take sev- eral more years, financial restructuring needs to 60 be done novv-and in such a way as to ensure that deep operational restructuring will follow. 30 The costs of financial sector restnicturing are high in the East Asian crisis countries-ranging from 16 to 50 percent of GDP-and are creating _ _ - _ large fiscal burdens. If the governments absorb Indonesia Republic of Korea Malaysia T'hailand all these costs, public cdebt will rise sharply-in Indonesia to more than 90 percent of GDP, and Source: Claessens, Djankov, and Klingebiel 1999. in Korea, Malavsia, and Thailand to 37 to 48 per- cent. The large fiscal outlays have caused many The World Bank Group 3 BOX 1 USING ASSET MANAGEMENT COMPANIES TO RESOLVE BANKING CRISES-CROSS-COUNTRY EXPERIENCE Two main types of asset management companies can be dis- Rapid asset disposition vehicles fared somewhat better: tinguished: those set up to expedite corporate restructuring, two of four agencies, those in Spain and the United States, and those established as rapid asset disposition vehicles. A achieved their objectives. These successful cases suggest review of seven asset management companies (in Finland, that asset management companies can be effective, but only Ghana, Mexico, Spain, Sweden, the Philippines, and the for narrowly defined purposes of resolving insolvent and non- United States) reveals a mixed record. viable financial institutions and selling off their assets. But Two of the three companies set up for corporate restruc- specific conditions are required: assets that are easily liqui- turing failed to expedite restructuring, suggesting that asset dated (real estate), professional management, political inde- management companies are rarely good tools for this pur- pendence, skilled human resources, appropriate funding, pose. Only the Swedish asset management company man- adequate bankruptcy and foreclosure laws, good information aged its portfolio successfully, acting in some instances as management systems, and transparency in operations and lead agent in the restructuring. But it was aided by special processes. circumstances: the assets it acquired were mostly in real In Mexico and the Philippines the asset management com- estate, not manufacturing (which are harder to restructure). panies were doomed from the start by transfers of politically and they were a small fraction of the banking system's assets motivated loans or fraudulent assets difficult for a government (making it easier to maintain independence from political agency susceptible to political pressure to resolve or sell. pressure and to sell assets back to the private sector). Both agencies failed to achieve their objectives. Source: Klingebiel forthcoming. observers to question the sustainability of pub- But durable economic recovery in the East Asian lic debt as interest payments threaten to take up economies will require more and deeper corpo- a large share of fiscal revenue. rate restructuring and improvements in the allocation of investable funds. Without sharply State ownership has increased sharply in the accelerated financial restructuring, the risk of a crisis-affected countries. Through support for downturn is high in some countries. weak financial institutions and acquisition of nonperforming loans by publicly owned asset Three strategies for financial management companies, the state now controls restructuring an average of about 100 percent of GDP in finan- cial assets, up from 45 percent before the crisis Three approaches to financial corporate restruc- (figure 2). Governments have had limited suc- turing can be distinguished. Countries can use a cess in selling off such assets: they have sold centralized, government-led approach by focus- only five banks, and asset management compa- ing asset recovery in one public agency, an asset nies have sold only 2 percent of corporate assets. management company (box 1). Centralizing assets may help consolidate skills and resources The countries have made some progress in pol- and ease the monitoring and supervision of icy reform, but much remains to be done. workout practices. As claims are consolidated, Financial sector regulations-such as loan clas- leverage over debtors may be increased and per- sification and provisioning guidelines-still trail verse links between banks and corporations bro- international best practice, and the rules for deal- ken, allowing better collection of loans. Yet an ing with weak financial institutions (a factor con- asset management company holding a large tributing to the crisis) need further tightening. share of corporate claims is difficult to insulate Improvements are needed in the governance from political pressures. Moreover, transferring structures of banks and corporations to ensure loans breaks the links between banks and that resources are used most productively. And corporations-links made valuable by banks' bankruptcy and reorganization procedures need privileged access to corporate information. And further strengthening and streamlining. if an asset management company fails to actively 4 How to Accelerate Corporate and Financial Sector Restructuring in East Asia FIGURE 3 CONCENTRATION OF OWNERSHIP AFFECTS EASE OF CORPORATE AND FINANCIAL SECTOR RESTRUCTURING BANKS OTHER FINANCIAL INSTITUTIONS 4-44% 28%-* Other financial 15 largest institutions _ j _ : j ~~~~families 51% 1 7% _ _ ~~~~13% 8/ 8_% Government 30% _ 26% 15 largest 12% families 130/ Government 30/a 15 largest families 16% CORPORATIONS BANKS OTHER FINANCIAL INSTITUTIONS 15% 14%0/0nj c fin s _ 17°/017% Governmen Government 5a 12% 5laryest 38% 18% 45%0/ ~ 10%/ 9% 6y / 12% / Government 8% Corporations 8% \ ~~~~15 largest / \\ 0 0 069% / CORPORATIONS Note: Percentages refer to relative shares of concentrated cantrol. Conicentrated control refers to owners with stakes of more than 5 percent. Source: Claessens, Djankov, and Klingebiel 1999. The World Bank Group 5 manage the assets it holds, it can undermine Asia are warehousing assets or trnTing to restructure credit discipline in the entire financial system. corporations rather than pursuing their main objective, disposing of assets; this is much like the The decentralized. creditor-led workout ap- experience in developing countries. Many of the proach relies on banks and other creditors to prerequisites for successful asset management resolve nonperforming loans. Since banks know companies are missing in East Asia; for example, the borrowers, and since their own survival many of the assets transferTed are corporate, not depends on asset recovery, they may be better real estate assets, which tend to be easier to restruc- able and more willing than asset management ture. In addition, the large state ownership stake companies to maximize recovery value and has made restructuring susceptible to political inter- avoid future losses. Furthermore, banks can pro- ference. And the state can hardly be expected to vide new loans during debt restructuring. force through corporate restructuring measures that would lead to large layoffs. To be successful, however, decentralized debt workouts require limited or no ownership links The decentralized approach suffers in many East between banks and corporations (since other- Asian countries from ownership links between wise the same party would be both debtor and banks and corporations, wveakly capitalized crcditor), adequately capitalized banks, and banks, and disinceintives to deep restructuring. proper incentives for banks and borrowers. The In Korea the many relationships between enti- slow pace of restructuring inJapan is due in part ties has hampered the resolution of financial dis- to the extensive ownership links between banks, tress for corporations and financial institutions other financial intermediaries, and corporations (see figure 3). Such relationships are also preva- (figure 3). The heavy cross-ownership led to a lent in Malavsia and Thailand. deadlock of claims that took a long time to break. Decentralized debt workouts also require that Despite several rotnds of recapitalization, banks banks be adequately capitalized, so that they in all four crisis countries remain undercapitalized have the loss absorption capacity needed to because of their nonperforming loan portfolios. engage in corporate restructuring. Allowing Coordination problems among creditors remain banks to recapitalize through increased earnings large, delaying restructuring. Furthermore, many over a long time horizon (through implicit or creditors are weakly capitalized (Indonesia, explicit forbearance) limits their ability to engage Thailand) or face poor incentives (many banks in in rapid corporate restructuring. Korea are government owned, and banks in Thailand have extensive links with corporations). Finally, countries can adopt restructuring strate- Moreover, it is questionable whether banks will gies predicated on the recovery qf economic be strong enough relative to corporations. activityl and grouwth. This approach relies on fis- Because of the social and political consequences cal stimulus and external demand to increase of enterprise restructuring, and 'too big to fail" growth and thereby lessen the need for corpo- arguments, banks may be unable to hold their rate and financial restructuring. own, especially against the large conglomerates in Korea. The record in East Asia Finally, the incentive framework- in which banks Most East Asian crisis economies are pursuing a and corporations operate remains weak. Rules mix of the three approaches. Indonesia, Korea, and for loan loss provisions, loan classification crite- Malaysia have transferred large amounts of non- ria, and disclosure still allow banks to carry non- performing loans to asset management companies. performing loans. And bankruptcy systems are But this cenitralized approaclh has yet to show muclh too weak to force borrowers to come to the table success. Most asset management companies in East with good restructuring proposals. 6 How to Accelerate Corporate and Financial Sector Restructuring in East Asia :1 _ *'''e__I' S S * )VAU The Japanese banking problem started in the late 1980s, when in early 1998 did the government pass emergency measures, deregulation allowed large corporations to switch froFn bank making more public funds available, creating a framework to to capital market financing, eroding banks' profitability. resolve banking problems, requiring banks to recognize bad Having lost their low-risk customers, and aided by lax regula- loans, and removing tax barriers to workouts. tion and extensive deposit guarantees, banks aggressively Corporate restructuring. For much of this period financial expanded into real estate (which rose from 15 to 35 percent of institutions with weak capital positions avoided making loan total lending in 1970-88). Fueled by bank funds, real estate and loss provisions or writing off loans and did not force corporate stock markets expanded rapidly until 1990, when the collapse restructuring. Moreover, they lacked many of the tools for deal- of real estate and equity prices turned many loans nonperform- ing with debt restructuring expeditiously (including insolvency ing and reduced banks' capital positions. laws). Their usual practice was to stretch out maturities and Financial sector restructuring. The government was slow carry loans indefinitely. The web of relationships between core to address the problem in any comprehensive way. In 1992 it shareholders and main customers ensured that aggressive col- relied on assisted mergers and explicit forbearance to cope lection efforts remained rare. Very low interest rates reduced with bank losses, hoping for quick recovery of the economy the costs of carrying nonperforming loans, which continued to and the real estate market. As small financial institutions be concealed. Existing corporate management generally and savings and loan companies showed signs of acute remained in place, no matter how inefficient, and nonviable cor- distress-partly as a result of gambling to recover losses- porations even received new money. the government followed with a ten-year "rehabilitation" Only recently have large firms, having faced massive plan, predicated on a recovery of land prices. But land prices losses in 1998, started significant efforts to restructure, while failed to recover, and nonperforming loans continued to grow temporary special loan guarantees have given small firms in size and number. some breathing room. As a result of banks' improved capital The government tried a new approach in 1994-95. It closed positions and stronger accounting rules and regulations, some credit cooperatives and savings and loan companies. It bank-led informal reorganizations have also picked up also created an asset management company, which ended up recently. While these are encouraging signs, many reforms warehousing the assets of failed credit cooperatives rather remain to be undertaken, including overhauling the bank- than disposing of them. Facing growing international pres- ruptcy codes. sures, the government introduced legislative reforms, limited Hopes for recoverypinned on gro wth. Following the col- the operations of weak financial institutions, and strength- lapse of the asset price bubble in 1990, Japan's GDP growth ened the deposit insurance scheme. But it left accounting averaged only 1.5 percent a year, compared with 4.5 percent rules and the supervisory framework unchanged. during the previous decade. The authorities' strategy for The government continued to expect that banks could banking sector recovery was predicated on a resumption of grow out of their problems by widening their interest spreads, growth that would restore banks and borrowers to financial thus taxing depositors and borrowers for the recapitalization strength. Yet despite large and repeated fiscal stimulus pack- costs. But several more banks failed, prompting the govern- ages (which boosted gross public debt from 70 percent of ment to extend an unlimited guarantee on all deposits in 1996. GDP in 1990 to 120 percent in 1999) and a loose monetary pol- In 1997 several prominent securities companies failed, requir- icy (with overnight rates at 0 percent), durable growth has yet ing significant liquidity support from the Bank of Japan. Only to occur. Source: International Monetary fund 1998. The World Bank Group 7 To speed restructuring, countries are trying to u An auction process to deal with the nonper- enhance the decentralized approach, including forming loans of small corporations. by making out-of-court systems more demand- *Employee ownership to reduce workers' resis- ing. But such steps may not suffice, and some tance to, and thus to accelerate, restructuring. can create their own risks. Thailand, for exam- ple, is encouraging banks to set up private asset Specialized investment funds management companies, some managed by independent advisers. But private asset man- Viable corporate financial restructuring will have agement companies can be a mixed blessing. to involve debt-equity swaps in which banks Transferring loans to an asset management com- acquire shares of corporations. That puts a heavy pany does nothing to strengthen banks' capital burden on banks, which lack the technical position, and it can allow banks to hide losses capacity to deal with large-scale restructuring of by using above-nmarket prices for the loans. corporations and corporate debt. If banks end up holding the converted equity-which would The resurgence of growth now under way in he necessary in some countries to ensure viable some East Asian countries may fade once initial corporations-they will become unstable and inventory rebuilding and recovery of consumer more akin to mutual funds. demand have run their course. And a combina- tion of high grovwth and continued low interest To relieve banks of these problems and facilitate rates is unlikely when demand for investment restructuring, a government could create a class funds rises again. The Japanese experience shows of specialized investment funds. These could be that a growth-oriented strategy is risky when bank privately managed (with a mix of domestic and and corporate distress are systemic (box 2). foreign management), venture capital-like funds, possibly organized by industry, and All this suggests that the financial restructuring established explicitly to buy nonperforming strategies being pursued by the East Asian crisis loans, restructure distressed assets, and manage economies are unlikely to bring deeper financial the converted equity. Equity shares already held restructuring and institutional reform. Moreover, by banks could also be transferred to them. The the barriers to achieving these goals remain-the funds would be owned by the government, with concentration of corporate control in the hancds financing possibly coming from the banks as of a few families, the strong political connections well. Their managers would work under perfor- of these families, and the extensive links mance contracts whose payout depends on the between banks, nonbank financial institutions, valuation of the assets under management at a and corporations. The risks are high of a stale- final, future date (for example, three years mate and a situation similar to that in Japan- away). where banks continue to carry nonperforming loans ancl corporations delay needed structural These funds woould differ from most asset man- adjustnments while the government tries and fails agement companies in three ways. First, they to reinvigorate growth through fiscal stimulus. would focus on corporate restructuring, including taking control of corporations when warranted. Making growth last-three additional Second, they would be managed by the private steps sector, with a mix of domestic and foreign man- agement. Third, governments could create several East Asian governments need to consider three of these vehicles, which could then compete for addlitional steps to accelerate and deepen the the purchase of nonperforming loans from banks. restructuring process: * Specialized investment funds to break the links Competition and early involvement. The funds between interested parties. could compete in buying nonperforming assets 8 How to Accelerate Corporate and Financial Sector Restructuring in East Asia from financial institutions and w^ould provide for distribution to the general public of shares in the a transparent process of taking assets off banks' funds; this would create a market for the funds balance sheets. To accelerate and deepen cor- that could provide signals for adjusting the per- porate restructuring, the funds w)ould participate formance contracts of fund rmanagers. earlv in the restructLring process to help shape the deal and give the banks the advantage of The fund in action. Consider the following exam- investors' specialized restructuring skills. ple. A corporation has US$80 in a bank loan but a market value of assets (present value of salable A fund would participate directly in the workout assets or fhture cash flows) of US$70-and thus process betvween banks and a corporation, nego- a negative equity of USS10. As a consequence of tiating as a potential equity investor in the restruc- the financial distress of its corporate borrower, tured corporation. It would take over part of the the state-owned bank is undercapitalized: it has corporation's bank loans and swap claims for an outstanding loan of US$80 that is worth equity, leaving the banks to lengthen maturities US$70. holds USS10 in government bonds, and and provide some interest relief and working cap- has US$80 in deposit liabilities. Thus whilc its ital. Banks w-ould not engagc in debt-equity notional equity is US$10, its true value is zero swaps. (figure 4). Having the fund enter the negotiations at the The fund now engages in three party negcotiations same time as the banks wTould improve the with the bank and the corporation, reaching a prospects for viable restructuring deals, as the debt restructuring agreement to be implemented kind would be under pressure to earn realistic, in two steps. In the first step, to restore the cor- risk-adjusted rates of return. It could also enhance poration to financial viability, the bank loan is the banks' negotiating power by making debt reduced to US$45, of wxhich US$35 remains in the relief and debt-equitv swaps available at the same form of a hank loan and US$10 is exchanged for time as debt restructuring and new money. subordinated debt to the bank-' The hank then swxaps USS35 of the remaining debt for a US$25 Transfer prices and values woul(d be determined equity stake in the corporation and writes off in negotiations between the banks and the fund US$10 by reporting a loss of this amount in its in competition with other funds and other profit and loss statement. investors. The banks would be recapitalized by the government based on a fLxed portion (say, 75 In the next step the fund swaps a loan of US$25 percent) of their losses. This approach would thus for the bank's US$25 equity stake, and US$ 10 in link govermllent support for bank recapitalization government bonds for the bank's UJSS10 of sub- to explicit progress in corporate debt restructur- ordinated debt. The liability side of the fund's ing and make transparent the tosses incurred by balance sheet shows a debt obligation of US$25 the banks in achieving the restructLring. to the bank and US$10 in equity owxned by the government. After an initial period the funds could be allowed to trade shares in corporations with one another The governrrent then compensates the bank for in an over-the-counter market. Later, shares of 75 percent of the writeoff of US$10 by injecting the funds themselves could be traded. The stnic- additional equity capital of U S$7.5 in thc forn of ture of the funds, as privately managed but pub- government bonds. The government's balance licly owned entities, would allow assets to be sheet consequently shows a liability of US$27.5 recycled to the general public over time. One (the US$10 in old bonds and US$17.5 in new). model for selling assets back to the public is the And it shows assets of US$17.5 (old and new Hong Kong model of disposing assets acquired capital in the bank, xwhose true value is US$7.5) during a period of market support. Another is and US$10 (the initial equity stake in the fund). The World Bank Group 9 FIGURE 4 BALANCE SHEETS BEFORE AND AFTER THE FUNDS Assets Liabilities Assets Liabilities Assets 100 80 Bank loan Assets 0 35 Bank loan (true value 70) 20 Equity 10 Subordinated loan . : : ~~~~~~~~~~~~~~~~~~from fund . . . ' ~~~~~~~~~~~~~~~~~25 Equity from fund 100 100 70 70 :~~~~~~~~~~~~~ W. ;1 _ Assets Liabilities Assets Liabilities Corporate loan 80 80 Deposits Corporate loan 35 80 Deposits (true value 70) 10 Equity Loan to fund 25 17.5 Equity from government Government bonds 10 (0 true value) Government bonds 27.5 Loss 10 90 90 97.5 97.5 Assets Liabilities Not established Subordinated loan 25 Loan from bank to corporation 10 10 Equityfrom government Equity in corporation 25 35 35 Assets Liabilities Assets Liabilities Equity in bank 10 10 Government bonds Equity in fund 10 27.5 Government bonds (true value 0) Equity in bank 17.5 (true value 10) 10 10 27.5 27.5 Source: Claessens, Diankov, and Klingebiel 1999. 10 How to Accelerate Corporate and Financial Sector Restructuring in East Asia Auctions-another option for restructuring corporate debt. Where equity markets are corporate debt depressed, introducing or increasing the use of employee ownership schemes can increase the Auctions could also be used to facilitate debt demand for shares. These features are particu- restructuring (see La Porta and Lopez-de- larly appealing during financial distress, when Silanes 1999; and Hausch ancL Ramachandran conflicts of interest between management, own- forthcoming). They may be well suited for ers, and emplovees run high and external financ- crisis-affected countries, where bankruptcy ing is hard to come by. In some countries procedures are poorly developed. A market- governments may have to remove tax impedi- based auction scheme would allow relatively ments to enable employee ownership plans. easy conversion of debt to equity while pre- senring the firm's value as a going concern. The financial crisis in Chile in the early 1980s is Some variants of the scheme would leave the one situation in which multiple stakeholders corporation in the hands of existing owners were invited into the ownership of distressed (and managers); others wotuld transfer it to the firms. The crisis had led to the nationalization of owner most capable of maximizing its value. many financial institutions and corporations. Using auctions could avoid the wasteful nego- The government undertook extensive financial tiations and delays often encountered in bank- reform and restructuring that involved reprivati- ruptcy procedures. zation. Because the supply of private equity was limited, the government used innovative means An auction is probably best suited for small to sell off nationalized assets. One approach was debtors with few creditors where speed is essen- to set up funds to purchase assets of specific tial to preserve going-concern value and the costs companies on behalf of the workers. The pur- of formal bankruptcy and reorganization are chase price for the shares was raised through large relative to the claims being restructured. bank loans secured by the purchased assets and the deposit of additional shares received bv the A complementary step to reduce employee workers as compensation. Upon repayment of resistance the bank loans, the funds were dissolved and the shares went directly to the workers. Participation by employees and other stake- holders can help facilitate financial restructuring. In the United States employee ownership plans In a country moving from a pay-as-you-go pen- have often been used in restructuring specific sion system to a more fully funded, privately firms. Up-front restructuring costs can be managed pension fund system, assets can be reduced by granting employees equity owner- reprivatized by endowing the new private pen- ship in exchange for wage concessions and sion funds with some of the assets after they are sometimes job cuts. In a w-ell-known example worked out by the private managers. Or corpo- United Airlines negotiated significant wage con- rate assets can be swapped with employee cessions in return for a majority equity stake for retirement funds or accrued future staff benefit employees. By effectively communicating the obligations. benefits of the restructuring to investors and financial analysts, the company created addi- Employee participation has broad attraction. It tional shareholder value, enhanced the restru-c- reduces resistance to changes in ownership, turing effort, and gave the capital market a including foreign sales. It softens the fear of job positive view of its strategy (Gilson 1995). losses and can reduce the risk of conflict between labor unions and management. The exact amounts f det reduction and new debt W(Uld he Employee ownership aids the formation of dcetrnined in iec negotiations between the banoc, borrower, and equity in the economy and can help reduce fundi (or funds), possibly in cotmpetition with othier investors. The World Bank Group 11 References Claessens, Stijn, Sinmeon Dyankov, and Daniela flingebiel. 1999. 'Financial Restructuring in East Asla. Halfway There?" Financial Sector Discussion P'aper 3 NI/odd Bank, Washington, D.C. Gilson, Stuart. 1995. 'UAL Corporation." Case Study 9-295130. Harvard Business School, Cambridge, Mass. Bausch, Donald B , and S. Ramachandran. Forthcoming. "Bankroiptcy Reorganization through Markets. Auction-Based Creditor Ordering by Reducing Debts (ACCORD)." Wirld Bank, East -Asia and the Pacific Region, Poverty Reduction and Economic Manaagement Sector Unit, Washington. D.(. International Monetary Fund. 1998. 'Japan: Selected IssUes." Washington, D.C Kitngehiel, Dantiela. Forthcoming "The I'se of Asset Management Companies in the Resolition of Banking Crises: Cross-Country Experiences." Policy Research Working Paper. World Bank, Financial Sector Strategy and Policv, Washington, D.C La Porta. Rafael, and Florencio Lopez-dce Silanes 1999 "Creditor Protection and Bankruptcy Law Reform' Hatsard University, Cambridge, Mass Stun Claessens, Simneon Ljanlkov, anid Daiiela Kliagebiel, Financial Sector Strategy aid Policy Viewpoint is an oper forum intended to encourage dissemination of anc debate on ideas, innovations, and best practices for expancling the private sector. The views published in this series are those onte authors and should not be attributed to the World Bank or any cf its affiliated organizaticins. Nor do any of the conclusions represent official policy of the World Bank or of its Executive Directors or the countriesthey represent. To order additional copies please call 202 4581 til 1 or contact Suzanne Smith, editor, Room Fl I K-208, The World Bank, 1818 H Street NW, Washington, D.C. 20433, or Internet address ssmrth7@ worldbank.org. The series is also available on-line (www.worldbank. org/html/fpd/notes/). @ Printed on recycled paper.