Fixing Thailand's Debt Mess

Desperate Thai companies will stop at almost nothing to thwart foreign intervention

It's 8 p.m., and Anthony Norman has called it quits for the day. A bodyguard concealing a handgun beneath his pinstripe suit escorts him to the elevator, where a second man waits. The three descend 23 floors to the basement garage. The guards make sure no assassin is lurking behind a pillar. One bundles Norman, 50, into the back of a maroon Mercedes 300E, then climbs in front to ride shotgun. The other, in a second car, brings up the rear as they pull onto Bangkok's busy Sathorn Road.

The man at the wheel of Norman's car is a Thai cop trained by the Australian Special Air Services commando unit. He keeps a wary eye out for suspicious-looking motorcycles that might be carrying gunmen. If one pulls alongside, Norman is trained to grab a bulletproof vest and use it to block the flying lead. Mindful that a Thai hit man will take a life for $800, he flashes a small smile: "I protect myself."

Anthony Norman is an accountant. He works for Ferrier Hodgson, an Australian firm that specializes in restructuring the debt of profligate companies. It's easy to see why Norman wants someone to watch his back. His firm is wielding the hatchet in Thailand's biggest financial restructuring, the $3.7 billion debt workout of Thai Petrochemical Industries. In December, Norman replaced TPI's founder, Prachai Leophairatana, as acting chief executive. While Norman has not received any death threats, one can't be too careful. Two years ago, an Australian auditor was murdered while looking into creative accounting at a Thai sugar mill.

Welcome to Thailand's Debt Wars. On one side are the foreign accounting firms, of which Norman's is by far the most active: To date, Ferrier Hodgson has handled more than $10 billion worth of debt restructurings at Thai companies (table, page 22). Competitors at the Big Five accountancies are catching up fast. Last month, PricewaterhouseCoopers clinched the $1 billion debt-workout plan for the Bangkok Skytrain.

Pitted against the foreign number-crunchers are companies like TPI, whose founder, Prachai, has tried just about everything to thwart his creditors--from accusing the Finance Minister of conspiring with the International Monetary Fund against him to suing Ferrier Hodgson for embezzlement on the grounds that it is billing TPI for Norman's bodyguards. (Prachai did not respond to requests for an interview and did not answer faxed questions.)

COZY AGREEMENTS. The Invasion of the Accountants is a slap in the face for Thailand Inc. Until the crisis, few Thai companies had to endure outside scrutiny. The concept of bankruptcy didn't exist. Bank loans were sealed with a handshake, and cozy relationships between bankers and their blue-chip clients ensured that loans would be automatically rolled over if the debtor couldn't service them for some reason.

The 1997-98 financial meltdown changed all that. And no one was harder hit than Prachai. He founded TPI in 1978, and by 1994 had plans to build it into Southeast Asia's first fully integrated petrochemical company. This involved spending billions on a sophisticated plant that breaks down semi-crude oil into compounds used to produce plastic, rubber, and lubricants. To bring in raw materials, he invested in wharf and handling facilities on Thailand's eastern seaboard. And to provide a steady supply of electricity, Prachai built a 100-megawatt power plant. TPI even opened its own gas stations.

By 1996, the company was poised to take advantage of economies of scale for both products and sources of supplies. "There were fundamental reasons behind what they did; it made a lot of sense," says Maria Lapiz, a senior analyst with SG Securities in Bangkok. "But they borrowed too much. That's the prime reason the whole thing failed. Had there been no crisis, this wouldn't have happened."

After the crash, Prachai tried to appease his creditors by putting a cement company on the block. But he was asking far more than what the plant was worth, and it became clear that his notion of debt restructuring was not going to fly with his creditors. Prachai's strategy seems to have been to halt loan payments, drag out the process, and hope that the loans would be forgiven. In all of this, his main aim was to keep control of TPI. Many Thai companies did the same.

When the Asian economic boom was at its peak, foreign lenders arrived by the planeload offering Thai companies loans, often doing only cursory due diligence. Later, Prachai and other Thai industrialists, with some justification, held outsiders responsible for their plight. But as Prachai and his ilk played the blame game, the debt mess worsened, putting pressure on the banks and the rest of the economy. Fearing further economic damage, the government amended the bankruptcy law in 1998. This was a major breakthrough, but it had limitations. Before they can force a debtor company to accept a planner, creditors must prove insolvency in the courts--a process that can take years, especially when the debtor refuses to cooperate.

COERCION. As a result, indebted companies often must be coerced by the new bankruptcy court into restructuring. "The bank doesn't want to take a haircut, and the owner doesn't want to lose the company," says the Thai director of a U.S.-owned venture-capital firm who says he has received death threats for his role in a debt workout. "And these are politically connected people, so it's difficult to get things moving."

The need to get things moving has become even more pressing since the Jan. 6 election of telecom tycoon Thaksin Shinawatra as Prime Minister. He has proposed setting up a national asset-management corporation to take over bad loans and revising investment laws to make it harder for foreigners to buy distressed assets. "If they do this, people will say, `let's invest somewhere else,"' says outgoing Deputy Prime Minister Supachai Panitchpakdi, who in September will become chief of the World Trade Organization. "This won't bring us more credibility in the international community."

Given the unwillingness of Thai executives to move aggressively, the burden has fallen on foreign lenders to play bad cop. That's where auditors like Anthony Norman come into the picture. His success at sorting out TPI could determine whether or not Thailand stays the course in cleaning up its mess. It's a dangerous job, but someone has to do it.

Needing 24-hour protection was the last thing Norman expected when he flew to Thailand in September, 1997. Bangkok Bank had hired Ferrier Hodgson to help it recover more than $600 million in loans from TPI. Back then, Thailand's biggest lender didn't even have a debt-recovery department; Ferrier Hodgson sent Norman to help it set one up. He promised his wife he would be home by Christmas.

"A LOT OF SOCIAL STRAIN." By the spring of 1998, Norman's wife and son had joined him in Bangkok. Ferrier Hodgson had opened a permanent office and was fast becoming a leading player in Thailand's burgeoning debt-workout business. Founded in Sydney in 1977, the firm made its name working with deadbeat borrowers during Australia's early-'90s recession.

Part of Norman's job was to get basic data on TPI's assets and liabilities. He quickly realized there was no point trying to bully the company's founder, Prachai. In the U.S. and Europe, creditors play hardball, but the Thais have no such tradition. "If you gave creditors the same bargaining power as in the West," explains Thai Farmers Bank President Banthoon Lamsam, "there would be a lot of social strain."

The strain was clearly showing in March, 1999, when Michael Wansley, an Australian accountant who worked for Deloitte Touche Tohmatsu, was gunned down near Nakhon Sawan, a town 240 km north of Bangkok. Wansley had been on his way to inspect bookkeeping irregularities at a sugar mill owned by Kaset Thai Co. His murder sent shudders through the accounting industry. Later, as Norman tangled with Prachai, he wondered if a TPI factory worker might think he was "doing his boss a favor by getting me out of the way."

After Wansley's murder, many foreign firms introduced sensitivity training to ensure that staff treated the Thais with respect. Norman, a burly but soft-spoken man, knew better than to be confrontational as he set about persuading Prachai to open the books. Norman says Prachai was never hostile, but he was obstructionist, keeping Norman hanging around, for example, in the anteroom to his office. One day, after he got tired of waiting for a scheduled meeting, Norman left. Downstairs, he saw Prachai's Mercedes 500E in the parking lot. "A few minutes later [Prachai] called to say he was stuck in traffic," says Norman. "We used to have these kinds of games."

On another occasion, Norman sent a subordinate to check TPI's books. First, TPI wouldn't hand over the keys to the secure document room, and when it finally did, the auditor received keys for the filing cabinets--but not for the door. Such stalling happened elsewhere, too. Deloitte partner Hugh Mosley was hired to work on the books of a cash-strapped auto-parts maker. "We'd be locked in a windowless room with no access to staff and be handed papers one at a time," he recalls. "It was impossible to make a link between them and the factory itself."

Throughout the TPI saga, Prachai fretted about his reputation. His creditors urged him to publicly declare TPI insolvent, but pride stopped him. Finally, on Mar. 15, 2000, the Central Bankruptcy Court ordered a debt workout to begin, and five weeks later, TPI's 150 creditors chose Ferrier Hodgson's subsidiary, Effective Planners, to oversee it.

Norman's first task was to get the creditors to agree on a debt-workout strategy, a process that is always arduous because each lender has its own agenda. Ferrier Hodgson's staff spent half their time flying to meet with TPI's far-flung creditors. These included not only Thai lenders such as Bangkok Bank and state-owned Thai Krung Bank but also global giants such as International Finance Corp. (the World Bank's investment arm), Citibank, and Bank of America. While foreign lenders were less concerned about stepping on toes, Thai creditors were leery of shaming one of their own in a society where bankruptcy isn't mentioned in polite circles.

Under Norman's workout proposal, the creditors would convert about $756 million in unpaid interest into a 75% stake in TPI, reducing the Leophairatana family holdings from 60% to 15%. The idea must have horrified Prachai. Norman recalls him saying things like "If you make me eat poison, I'll make you eat it, too." While Prachai continued publicly to express optimism, Norman says he wasn't so sanguine in private, and recalls Prachai asking him: "If you get control of the company, you're going to get rid of me, aren't you?" Norman says he replied: "Of course."

DRIPPING FANGS. On Nov. 15, the day before creditors were to vote on Norman's rehabilitation plan, he met with 3,000 TPI employees to explain things. It didn't go well. When Norman got up to talk, the mike was turned off, and when he did speak the crowd heckled him. The next day, he pulled his staff out of TPI facilities. Meanwhile, thousands of TPI employees converged on the convention center where the creditors were set to vote, brandishing banners depicting Norman as a vampire with dripping fangs. "Norman the bloodsucker," the signs declared. The vote was postponed for 10 days, but in the end the creditors approved Effective Planners' four-year blueprint.

Norman suffered Prachai's increasingly frantic maneuvers with his customary stoicism. "I'm rather fortunate that I've always been able to switch on and off," he says, "though in this job it's more difficult than any other." After work, Norman unwound by spending time with his six-year-old son, tossing around a rugby ball and stargazing. "I get lost in parentalism," he says. "I indulge in simple, worthwhile things."

On Dec. 14, Prachai tried and failed to have the bankruptcy judges disqualified, paving the way for Norman to become TPI's acting CEO. His job has really only just begun. TPI still must be rehabilitated, after all. The company needs to borrow money so it can boost crude-oil consumption at its refinery from 60,000 to 110,000 barrels a day. Norman plans to raise up to $200 million this year by selling off the power plant, water-treatment facility, and part of the cement factory. He says that TPI will be able to retire another $900 million in debt over the next four years thanks to cash flow that, he expects, will hit $640 million in 2003.

And he still has Prachai to contend with. The dogged Thai continues to show up at his old office and has been posting notices in the elevators telling staff he's still in charge. In mid-January, Prachai made a last-ditch attempt to regain control of the company, filing an appeal to the Supreme Court to overturn the bankruptcy decision. A ruling isn't expected until later this month. That's a hassle because it's preventing Norman from getting the loans that TPI needs. Norman compares Prachai to a man who doesn't realize the battle is over. "He still hears guns and thinks he's winning the war."

Of course, not all Thai executives are so hard to deal with. Consider Ferrier Hodgson's client SVOA PLC, Thailand's largest PC retailer. An exclusive distributor for Epson and Acer Inc., SVOA sank under $190 million in debt when the baht collapsed in 1997. Management voluntarily met with creditors and admitted a diversification into real estate had been unwise. The creditors got 90% of the equity, but at least the company kept operating. "Now, we make sure every single penny is [spent] on core business," says Vira Intanete, chief operating officer of IT distribution. "Ferrier Hodgson enhanced the discipline in our organization."

Unfortunately, SVOA is the exception. Few of the thousands of troubled Thai corporations have been able to reorganize and start over with clean balance sheets. True, nonperforming loans on corporate and bank ledgers have declined from 44% of all loans in 1998 to 22% today. But that's mostly because so much debt has been shifted into government-run asset management corporations, where it is sold for a fraction of its value or written off.

Even successful restructurings cause long-term problems. Banks end up holding most of the equity in companies that lack the management expertise to save them. "The tradition of owners and management being the same makes the transition difficult," says Chumpol NaLamlieng, president of Siam Cement Public Co. "And because of language and cultural barriers, it's not easy to bring expats in."

More troubling is the fact that some companies are again not servicing their debts: They cling to the belief that they can grow their way out of trouble and pay their creditors off later. "I don't know if it's reckless optimism or denial," says Norman. Either way, it seems he and his firm will have work for years to come.

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