Pandemic aftermath may push banks, big borrowers into debt restructuring

The full extent of the coronavirus pandemic-inflicted damage on Philippine companies and the local financial system will only begin to manifest itself over the next couple of years, as there is always “a lag time before you see the dead bodies.”

As such, banks and their large corporate borrowers will likely need to enter into contentious and difficult negotiations in the medium term to rehabilitate loans that would otherwise go into default as a result of the ongoing public health crisis.

“[Banks’] problem loans have almost doubled in July. Was that the peak? Definitely not,” said Higinio “Joey” Macadaeg Jr. who is the managing director of newly inaugurated New Horizons Financial Consultants Inc.

He pointed to the country’s experience during the 1997 East Asian financial crisis which saw the level of bad loans in the local banking system peak only in 2001 and 2002.

“It was so bad then that the Special Purpose Asset Vehicle Law was introduced,” he said, referring to a scheme introduced by policymakers to excise nonperforming loans from banks and transfer them into separate corporations for disposal, thus relieving banks’ books from the burden of carrying distressed assets.

Macadaeg noted that the funds allotted by Philippine banks for potential losses have always been higher than actual bad loans, but this situation has changed in recent months as the COVID-19 crisis started affecting borrowers’ ability to service their debts.

“Since the pandemic, the past due loans have surpassed the level of provisions,” he said. “That’s why you have read in the papers that the major banks are building up their provisions this year.”

So far, however, he said banks had been lucky because they all earned substantial trading income from their treasury operations arising from the decline in interest rates.

“This gave them room to book more loan loss provisions and still show a decent net income for 2020,” he said, adding that the banking industry is well capitalized and is in far better financial health than before.

But the New Horizons chief pointed out that “in any recession or economic slowdown, banks are always hit hard because of their loan portfolios, the quality of which is dependent on the economy.”

Because of this prognosis, New Horizons will offer financial advisory services to compliment the legal services of its partner firm, Divina Law.

These services include fund raising through debt or equity, restructuring, and a review of present financial and organizational structure of companies to check whether or not they are ready to operate under the “new normal.”

“Notwithstanding still a weak economy we anticipate companies to need funding for capex (Capital expenditure) to modernize their existing machineries and equipment to be more efficient,” he said. “Some will need funding for digitalization projects.”

And because the pandemic has affected the revenue and cashflow of many companies, there will be a need to assist them in restructuring their obligations with their creditors.

“There is no doubt that our economy will recover,” Macadaeg said. “The question is how long will it take. The recovery will clearly be a struggle.” INQ