Thai Petrochemical Saga Illustrates Asia’s Debt Bind
It began in the debris of Asia’s financial crisis as one company’s struggle to get out from under a mountain of debt. Four years later, the story of Thai Petrochemical Industries, one of Thailand’s biggest industrial companies, remains that and more.
Above all, TPI’s is a cautionary tale underscoring a lingering weakness of many Asian economies in the wake of the 1997 crisis: the difficulty of transforming prestigious but deeply indebted companies into engines for economic growth.
It also is a reminder of how hard it is for Asia’s banks to break free from the economic weight of nonperforming loans--a drag considered so severe among some Japanese lending institutions in March that it set off a selling panic on Wall Street.
“It’s easy to be critical, but these are huge problems filled with sensitive political and economic issues,” said Jason Carley, a leading credit research specialist at Merrill Lynch in Hong Kong. “Do governments really want their corporate giants to go into default?”
Largely because of these difficulties, TPI remains Thailand’s single biggest corporate deadbeat, laboring under nearly $3 billion in debt it can’t pay. Efforts to revive it have spawned a nasty corporate fight--a seemingly endless saga of boardroom maneuvering, court actions, allegations of criminal activity and incendiary rhetoric, launched mainly by the company’s founder, Prachai Leophairatana, in an effort to retain control and fend off 150 creditor banks in 40 countries.
So far, the fight has brought more than a dozen lawsuits challenging a creditor-approved restructuring plan drafted last year. It has led to broken agreements, to sabotaged meetings and to an executive-suite burglary. It has made bodyguards and bulletproof vests part of corporate attire and spawned newspaper ads carrying accusations of incompetence, tax fraud and embezzlement against TPI’s creditor-appointed, court-approved administrator, Effective Planners, a subsidiary of the Australia-based financial restructuring and recovery firm Ferrier Hodgson.
The latest twist: a story last month in a Thai newspaper linking Effective Planners and Ferrier Hodgson to an alleged gem theft case in neighboring Laos.
Effective Planners Managing Director Anthony Norman, who now also doubles as TPI’s acting chief executive, has been shouted down by company workers carrying signs reading “Norman the Bloodsucker.” Meanwhile, Prachai clings doggedly to the symbols of his former power, traveling daily to his offices in TPI’s central Bangkok headquarters, still signing his correspondence “Prachai Leophairatana, CEO.”
In an interview, Norman strenuously denied the accusations made against him and his firm. He characterized the lawsuits as “vexatious” and noted that Effective Planners had several other corporate restructuring contracts in Thailand that were working smoothly.
Prachai, along with two brothers who once helped run the company, survives thanks to some deft footwork and the technicalities of Thailand’s labor legislation: The three formed a management trade union, then named themselves employee representatives--a status that guarantees their jobs under local law.
“They’ve had their executive authority suspended because they’ve refused to commit to implementing the [restructuring] plan,” Norman said. “From time to time they flex a little bit, but we keep putting them back in their boxes.”
Prachai first agreed and then declined to be interviewed for this article. Associates say he has been advised by friends not to meet with foreign media because he becomes so emotional about the subject that he hurts his own cause. But for much of his career, he enjoyed the reputation of an honest, successful businessman.
He founded TPI in 1978 and, over a period spanning nearly two decades, built it into one of Southeast Asia’s largest petrochemical companies. But he borrowed so heavily in un-hedged hard currencies that when the Thai baht crashed in the summer of 1997, so did his company.
Many who know Prachai sympathize with him, blaming reckless bank lending for at least part of his company’s problems. In a culture in which personal ties often count more than cash flow in winning a loan and bankruptcy is not discussed in polite company, he managed to keep TPI going for three years, abandoning loan payments.
“He’s an honest man who wants to do something for his business and his country,” said Walter Missorten, partner in a Brussels-based accounting firm that recently helped Prachai sell the family’s interests in another Thai company. “If he’s guilty of anything, it’s overbuilding.”
He’s also proved a tenacious opponent to his creditors.
As part of his strategy, Prachai has appealed to Thai national sympathies, casting himself and his family in the most emotive terms as a victim of greedy international banks interested only in taking their pound of flesh from Thailand’s economic base.
“He’s trying to keep money in the family and that’s a normal practice here, but he’s taken all this beyond the bounds of normal reason,” said Jeff Earhart, research manager at DBS Thai Danu Securities in Bangkok. “Prachai has resorted to nationalism, not good business practices.”
TPI employs about 6,000, owns its own oil refinery and produces an array of oil-based products ranging from heavy petrochemicals to finished plastic cups. Last year’s performance captures its financial plight. Though it managed an operating profit of about $95 million, some $300 million in interest payments and huge write-downs of inflated assets turned the bottom line into a $1-billion loss.
For Asia, the broader implications of the struggle to refloat TPI are not good.
For many Asia specialists, the inability to unwind bad debt is the biggest single cloud over the region’s economic future. With the exceptions of Hong Kong and Singapore, most countries in the region are afflicted.
The banks’ preference for rescheduling nonperforming loans rather than declaring them bad and moving against the debtors will be especially costly, analysts say.
“The price of this . . . approach will be paid by lower growth and higher taxes over the next decade,” said David Roche, chairman of London investment firm Independent Strategies.
But as the fourth anniversary of Asia’s financial crisis nears, there are signs that time may be finally running out on Prachai.
In November, TPI’s major creditors--mainly banks in Thailand and the West--formally approved a plan to restore the company’s financial foundation. The plan, worked out by Effective Planners, calls for swapping a chunk of TPI’s debt for equity and selling some of the company’s non-core assets.
Reaching the goal of halving its debt and doubling its cash flow to about $450 million by 2004 would restore TPI’s stability, Norman said.
Through the winter, Norman and his management team defeated a flurry of Prachai’s legal challenges to the plan. Then last month the team completed the first major step in the restructuring process: trading $751 million in debt for new shares that will give creditors 75% in an expanded TPI equity base.
The move reduced Prachai’s and family members’ holdings in TPI to 15% from 60%.
“It’s a milestone,” said Norman, a soft-spoken New Zealander who now counts a personal bodyguard among his employees. “The next job is to raise additional working capital.”
Norman hopes to net $200 million before year-end through the sale of a power plant and a large cement plant that he describes as nonessential to TPI’s long-term growth. He also hopes to borrow $100 million--which he acknowledges he must be creative to get.
Although the insurance could add 1.5% to 2% to the cost of borrowing, Norman said the move makes sense because the money would go toward raw materials that would generate far more cash for the company.
There are signs, Norman said, that his tense relationship with TPI workers may be easing, in part because he agreed, after meeting with supervisors in January, to pay workers a customary annual bonus for the first time since 1996. In another sign of cooperation, senior managers agreed to delay receiving their payments to ensure shop-floor employees are paid immediately.
“It was a big signal for us that they were prepared to make a personal sacrifice for the good of the company,” Norman said. At an earlier meeting with angry workers, the mood had been ugly enough for him to wear a bulletproof vest.
Despite such progress, however, few--Norman included--believe Prachai plans to give up.
“Each time we win a piece of litigation, his remaining options narrow,” Norman said. “Presumably, he’ll run out of alternatives at some point, but whether he actually ever gives up is a psychological thing.”
Independent analysts also believe Prachai has few cards left in his hand.
“Prachai has just about played his game out,” Earhart said. “His friends and family must be very proud of him, because he’s fought in every way he could. He’s invoked some interesting tactics.”
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Borrowing Trouble
Thai Petrochemical Industries’ debt burden from 1995 to 2000 was magnified because the company borrowed heavily in hard currency (mainly dollars and yen) but did not protect itself against the currency risk. So when the bhat crashed in 1997, the company’s debt became far greater in baht--the currency in which it generates most of its revenue. The early-March dip in total debt reflects a debt-for-equity swap.
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TPI’s debt, in U.S. dollars (In billions)
March: $2.95
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TPI’s debt, in Thai baht (In billions)
March: 128.3
Sources: Thai Petrochemical Industries, Effective Planners
