The document discusses corporate restructuring challenges in Bolivia's banking sector, where many loans had been reprogrammed but were still non-performing, and most corporations were over-leveraged but unwilling to restructure. It proposes a systemic crisis management framework including bank and corporate restructuring funds and bankruptcy reforms. Despite efforts, corporate restructuring has been slow to start due to various obstacles, so the Bank will sponsor a workshop to further encourage the process.

1. Corporate restructuring
The Bank’s experience in Bolivia

2. The FSAP diagnosis of 2002 highlighted
deep fragilities in bank loan portfolios…
4500 950
4053
4000 850
Loans 4218
3590
3391 750
3500 3289
3473 3520 3185
3442
Deposits 3317 650
3000 2746 2893 2840 2707
3035 3015 2672
519 538
2802 550
2719 489 571
2500
419
415 2513 450
2238
2000
350
295 302
266 276
1500
227 250
174 PDLs 194
153 149 245
1000 139
113 150
67 Provisions
53
50040 50
0 -50
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-96
Sep-96
Sep-98
Sep-99
Sep-00
Sep-01
Sep-97
Sep-02
Jun-99
Jun-00
Jun-01
Jun-96
Jun-97
Jun-98
Jun-02
Dic-95
Dic-96
Dic-97
Dic-98
Dic-99
Dic-00
Dic-01

3. … which banks had addressed with
loan reprogramming exclusively …
• Incentivized by government programs supporting
loan reprogramming;
• By Feb. 2002, 36% of loans had been
reprogrammed (up to 50% for some banks);
• 20% of them were non-performing soon after (up
to 65% for some banks), compared to 21% NPLs
in total loan portfolios;
• Yet, new regulation allowed for better risk
classification.

4. … because their tight capital situation
did not enable any loss taking
And, relaxation of prudential norms enabled them to hide inevitable losses
Solvency Deposit mkt share
90%
80%
70%
60%
50%
With governement support
40%
30%
20%
10%
0%
BDB BNA BSC BCR BCT BEC BUN BGA BIS BNB BME
Domestic banks

5. As to corporations, they had no
incentives to restructure
• Strong over-leveraging of balance sheets due to over-optimism
during boom;
• Most firms with limited prospects, low management skills and
obsolete technologies; hence most should exit the market;
• But, bankruptcy process entails stigma of fraud, and banks
cannot afford the associated losses;
• In addition, history of government bail out;
• And, fear of loss of control over family businesses.
 Hence, stand-still situation where everyone waits for a bail out
and refuses to take its share of losses
 Leads to no new lending, and thus to low economic growth, in
turn penalizing performing companies

6. The government hoped that economic
re-activation would do the trick
• The GoB hoped that higher economic growth would save
most companies, improve loan quality and bank health;
• Hence, they offered incentives for banks to grow their loan
portfolios:
– more time to meet provisioning standards;
• This had a perverse impact on banks …:
– Well managed banks find no healthy new loan opportunities and
therefore had to provision fully;
– Ailing banks increased their loan portfolios (with ailing borrowers)
and were granted more time to adequately provision their bad loans;
• … and on companies:
– Ailing companies found new loans, delaying bankruptcy treats.

7. Instead, the WB proposed a systemic crisis
management framework …
Systemic Bank and Corporate Restructuring
C
O
Troubled banks O
Troubled corporations
R
Diagnosis D
Viable Nonviable I Viable Nonviable
Restructuring Exit N Restructuring Exit
A
plan (Intervention) T (bankruptcy)
I
O
Resolution Judicial N Identify nature
liquidation of problem
&
Legal &
regulatory L Voluntary Efficient
frameworks Corrective Resolution E
G corporate corporate
regime framework
A reorganizations liquidation
L
Enabling S
mechanisms Bank Bank E Corporate
C
recapitali- recapitalization turnaround
U
zation fund, Central R fund
fund bank fund I
T
Y

8. … based on a comprehensive package
of reforms (part of a FSAC)
• Establishment of Systemic Restructuring Team at highest level;
• Ongoing reform of bankruptcy code, to allow faster company exits:
– Remove presumption of fraud;
– Remove need to obtain unanimous approval of a reorganization plan by all
privileged creditors (tax, labor, and secured claimants);
– Fasten bankruptcy process;
– Train judges.
• New law passed in July 2003 to enable voluntary workouts;
• Creation of two funds:
– For bank re-capitalization –available when capital inadequacy results from:
• The absorption of a failed bank;
• Loan losses resulting from corporate restructuring;
– For corporate re-capitalization and lending (with CAF) –available to viable
companies participating to corporate restructuring process.
• Creation of Superintendence of Companies in August 2003

9. Despite these significant efforts,
corporate restructuring is slow to start
• Less than 10 cases of voluntary corporate restructuring processes:
– Less than half involving viable companies (including the largest
employer in Bolivia);
– But, all banks are involved.
• Remaining obstacles:
– Lack of incentives to motivate the start of negotiations among parties;
– Unwillingness by companies to become transparent;
– Inability to restructure the debt of individuals and unregistered small
businesses;
– Remaining uncertainties in legal framework;
– Inadequate training of judges and arbitrators;
– Insufficient publicity on capitalization funds.

10. To encourage more corporate restructuring,
the Bank will sponsor a dedicated workshop
• Targeted at all parties involved in corporate
restructuring processes (borrowers, banks, minority
creditors, judges, arbitrators, authorities, labor
representatives, …);
• With international experts;
• With concrete successful examples from the region
(Colombia, Peru);
• With dedicated sessions for each group of attendees,
addressing in particular the remaining obstacles;
• With TA sessions for banks and the authorities.