THE ROLE AND PROGRESS OF THE WORLD BANK CONFERENCE ON “CORPORATE RESTRUCTURING: INTERNATIONAL BEST PRACTICES” THE ROLE AND PROGRESS OF Pengurusan Danaharta Nasional Berhad Malaysia

OVERVIEW OF ASSET MANAGEMENT COMPANIES (AMCs)

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

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

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

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

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…...

MALAYSIA’S BANKING SECTOR RESTRUCTURING PLAN

COMPREHENSIVE BANKING RESTRUCTURING PLAN Prevent a banking crisis Encourage FIs to continue to lend Enhance market efficiency Support economic recovery OBJECTIVES Short-termMedium/Long-term Create a resilient banking system Develop an efficient & competitive banking sector Broaden & deepen financial markets and strengthen financial infrastructure

BORROWERS CDRC DANAHARTA DANAMODAL BANK SPECIAL FUNDS COMPLEMENTARY ROLES Coordination of activities undertaken by a Steering Committee in Bank Negara Malaysia Restructure debt New loans Rehabilitate Inject Capital Cash Bonds Sell NPLs New l l oans/ Restructure distressed loans Facilitate restructuring where necessary

DANAHARTA: ROLE & ORGANISATION

THE AMC CONTINUUM NPL RESOLUTION AGENCYNeither 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 >RM5 million is small (approximately 3,000 accounts) Asset Management Company Rapid Disposition Agency Warehouse Agency Types of AMCs

DANAHARTA’S 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

DANAHARTA’S PROGRESS THROUGH PHASES ManagementManagement AcquisitionAcquisitionEstablishmentEstablishment 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 June ‘98 Sept ‘98 June ‘99 onwards

GOVERNANCE Oversight Committee Executive Committee Audit Committee Remuneration Committee Board of Directors Ministry of Finance

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 Two non-executive Directors representing the Government of Malaysia Datin Husniarti Tamin, Deputy Secretary General for Systems and Control, Ministry of Finance Dato’ Salleh Harun, Deputy Governor of Bank Negara Malaysia (Central Bank) CORPORATE INFORMATION

THE DANAHARTA ACT 1998 Main principles: Ability to acquire NPLs Ability to manage Ability to foreclose (National Land Code)

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

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

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

Affected Person SAs Further injection of capital White Knight Valuations Compensation Proposal THE APPROACH TO THE APPOINTMENT OF SAs Consolidation & Value Maximization Business Continues on Restructured Balance Sheet SAs Appointed Reviews Financials Assesses Viability Takes Control & Issues Notices

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 discharged80 2) Workout proposal implemented, SAs pending discharge12 3) Workout proposal approved by authorities, being implemented16 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 proposal15

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

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

ACQUISITION PHASE

MECHANISMS NPL > 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)

ACQUISITION APPROACH : PAYMENT FOR NPLs n FIs receive bonds as consideration for the purchase of NPLs except non-BAFIA FIs and Islamic facilities which require cash n 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 n Benefits of bonds - provides income - improves Capital Adequacy Ratio - provides liquidity

MANAGEMENT PHASE

MANAGEMENT APPROACH Management of Securities VALUE ENHANCEMENT Recovery Management of Assets propertyproperty businessbusiness VALUE ENHANCEMENT S A L E T O M A R K E T YesYesYesYesNoNoNoNo Loan Management Asset Management NPLs VIABLE LOANS NON-VIABLE LOANS FOREIGN LOAN ASSETS ASSET RESTRUCTURING Sale of collateral foreclosure R&M liquidation Sale of Business SA via BID PROCESS LOAN DISPOSAL Sale of Loan via BID PROCESS LOAN RESTRUCTURING Informal rescheduling redemption settlement Formal s.176 SA Recovery

LOAN MANAGEMENT - Loan Restructuring Viable loans are restructured using Danaharta’s 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 Danaharta’s special powers to leverage and benefit the banking system as a whole

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

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

PROGRESS OF DANAHARTA

Receive share capital from Government Receive share capital from Government Acquire NPLs Determine recovery strategies Implement recovery strategies TIMELINE Receive cash Receive non-cash assets - securities, properties and restructured loans Receive non-cash assets - securities, properties and restructured loans Convert to cash/ residual assets Cash/ residual assets Distribute to Government/ surplus recovery to respective financial institutions Distribute to Government/ surplus recovery to respective financial institutions Redeem bonds. Any shortfall will be borne by Government NPL Portfolio Receive NPLs to be managed Issue Government- guaranteed bonds Issue Government- guaranteed bonds June March 2000 Sep Dec 2001 Nov Sep Dec March 2005 End

NPL PORTFOLIO

DANAHARTA’S EXPECTED RECOVERY RATE Soft approach (viable loans) Hardapproach (non-viable loans) (non-viable loans) Acquired NPLs 49% Managed NPLs 66% ALL NPLs reviewed and recovery strategies identified

ANALYSIS OF RECOVERY PROCEEDS BY ASSET GROUP ( ANALYSIS OF RECOVERY PROCEEDS BY 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 = USD borrowers have fully settled RM14.58 bil (LRA) of NPLs, relating to 881 accounts

ANALYSIS OF THE CONVERSION OF NON-CASH ASSETS RECEIVED as at 31 December 2003

ANALYSIS OF RECOVERY PROCEEDS Total cash received as at 31 December 2003 RM billion Cash from recovery proceeds 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) Acquired loans RM6.08 bil Managed loans RM12.96 bil Note: RM1 = USD0.263

DISTRIBUTION OF RECOVERY PROCEEDS as at 31 December 2003

SUMMARY OF CASH STATEMENT as at 31 December 2003

STATUS OF DANAHARTA BONDS as at 31 December 2003

Factors which aid Danaharta’s progress (4) Private sector driven (6) NPL resolution, not NPL disposal (3) Concentrate on larger sized NPLs (2,000-3,000 accounts) ( 5) Clear thought-out process (1) International precedents (2) Legal powers under the Danaharta Act 1998

Information on Danaharta can be found at