RELENTLESS
An inside look at how CFOs at troubled companies are dealing with debt - and debt collectors.
By Steven Crane

"I've been rich and I've been poor. Believe me, rich is better." - Gloria Grahame in The Big Heat

We'll call her Miss Wong. She is a slight, sympathetic woman who, as she talks, gently brushes back the feathers of hair that float across her eyes. She is shy, even embarrassed, about the whole, sad mess. Miss Wong oversees the finances for a small Hong Kong trading firm - 1997 turnover of HK$24 million (US$3 million) - a task that is none too pleasant these days. In fact, it's damned worrisome. Her company, you see, is in debt and creditors call more regularly than customers. And debt collectors are very hard men, as Miss Wong points out, very hard men indeed. Men whom she wishes would just go away and leave her alone. But she knows that will never happen. "You have to realize that you cannot give them nothing," she says. "They're not your real enemy. It's their job to get money."

Time, tight credit and the recession, she says, are the real enemies. "If you want to stay in business, you can't hide away - you have to come to work every day to try and find new customers, try and get new orders, try and make some money to pay the debt," she says. "But it's very difficult to concentrate on business when you have this problem." This problem isn't likely to go away any time soon, either. Right now, Miss Wong can't pay her creditors. What she needs is time to find that which makes the world go around - money. Money, as Miss Wong well knows, can't buy peace of mind. It can, however, rent it.

If it is any comfort for Miss Wong, she is not the only one finding it difficult to pay creditors these days. The difference is, the bigger the business, the broader its options. A large company is better able to fend off dogged debt collectors, primarily because it has more money, better advice and a higher profile - all of which provide the muscle to negotiate with creditors. Big companies, says Richard Petty, a lecturer at Hong Kong University's School of Business, know when their bankers are actually going to foreclose on loans rather than just trying to bluff them into paying early. Conversely, finance managers at small-and medium-sized companies (SMEs) don't have the resources to pay for expert advice on how to handle creditors. And without that advice, says Petty, companies can plunge into a self-perpetuating downward spiral with little chance of resuscitation - unless a white knight happens along with a massive cash injection. These days, that's about as likely as a debt collector letting you off the hook.

"I've met a lot of hard-boiled eggs in my time, but you - you're twenty minutes." - Jan Sterling to Kirk Douglas in Ace in the Hole

David Li Kwok-po, chairman of the Bank of East Asia says bad loans in Hong Kong could double from their present levels in the next year. Elsewhere in Asia, the situation is no better. Thailand's corporate debt stands at about US$191 billion, with almost US$42 billion owed to foreign creditors. Non-performing loans in Malaysia are estimated at US$13 billion. Indeed, estimated total bad debt in Asia comes in at a staggering US$1 trillion.

This is not good news for bankers, who tend to panic when there's an increase in their number of non-performing loans. To prevent further losses, these bankers often take a careful look at their entire loan portfolio. Companies previously on interest-only loan arrangements are coaxed or coerced into early principal repayment - under threat of foreclosure. And if a company has a cashflow problem due to non-payment from its own debtors, new investments in the business, or simply mismanagement, it could end up in court. Such an event often triggers a sudden and devastating decline. "Once word leaks out that a company is in trouble," says Petty, who advises companies on debt management, "your credit and supplies will stop as it becomes known that you're a stuck fish flailing around in the water."

Many businesses, especially SMEs, are already floundering. Two-thirds of the 92,000 SMEs in Singapore are facing cashflow problems, according to Derek Goh, president of the city-state's Association of Small and Medium Enterprises. A recent survey by the Singapore Chinese Chamber of Commerce and Industry revealed that 3 percent of SMEs had their credit withdrawn or cancelled and 20 percent had their credit line reduced. A whopping 55 percent of the respondents said current interest rates on loans were more than they could afford. Not surprisingly, 4 percent of the 300 companies surveyed have closed, 18 percent have cut wages, 21 percent have cut staff, and 35 percent have reduced the size of operations. In Hong Kong, the situation is much the same. Denis Lee Wing-kwan, of the Chinese Manufacturer's Association says 10,000 SMEs went into liquidation from June to December and another 10,000 will collapse by the Lunar New Year if the credit crunch worsens.

For bigger fish, though, the chance of survival is better. In October 1997, three months after the Thai baht began its now infamous downard plunge, Thai Petrochemical Industry PCL (TPI) - a company with a net profit of US$184 million in the third quarter of 1998 against a US$900 million loss the previous year - suspended repayment of principal and interest on its debts. Wachirapunthu Promprasert joined TPI one month before the suspension specifically to help restructure the enormous US$3.2 billion debt owed to 148 local and foreign creditors. The deal now on the table involves a debt-equity swap which will give creditors a 30 percent stake, and a postponement of interest and principal repayment for the next five years. But the deal is as much about Asian versus Western business practices as it is about the bottom line. And for Wachirapunthu, that means standing firmly - and precariously - with one foot on either side of the creditors and his boss to try and reach a consensus. "Someone has to say yes," he says quite cheerfully. "If everyone says no, the middleman is dead."

After 18 months of negotiations, Wachirapunthu is still among the living. TPI's creditors, which include Citibank, Bank of America, and Chase Manhattan Bank, have yet to say yes to the proposal, however. One US bank official complains that lenders, not owners, should have first claim when a company goes bust. TPI's CEO Prachai Leophairatana argues that the idea of foreclosure, "a Western oddity," is unfair. Even with pressure from the IMF and the World Bank, Thailand's debt restructuring system is largely unchanged. And proposed new bankruptcy laws remain just that - proposed. Prachai, who is also a senator in Thailand's parliament, has reportedly joined forces with other lawmakers and businessmen to block the passage of a new law that would allow bankers to enforce bankruptcy judgements by foreclosing on assets.

In the meantime, it's business as usual. Without the burden of loan repayments, TPI has returned to positive cashflow. As for its creditors, Wachirapunthu admits some are angry, frustrated and un-comfortable. "But I would like to stress that to achieve debt restructuring the relationship has to be positive. It doesn't mean that the creditor will support the company 100 percent," he says. "That's not the case - it is a bad time. But we don't want a bad time either. Actually, we're more eager to have a good time than the creditors." If the deal goes through, and Wachirapunthu insists approval is just a formality, it raises an interesting question: what if your CEO isn't a member of parliament? The odds are you'll get to know your local debt collector.

"I don't like your manner." "I'm not selling it." - Audrey Trotter to Robert Montgomery in Lady in the Lake

Debt collectors have one thing in common with postmen - dogs don't like them. Nor, for that matter, do debtors. The collections industry suffers from an image problem that is, perhaps, not entirely justified. A lot of CFOs have a defensive attitude toward collections agencies, says Bobby Rozario, director of risk management at Hong Kong's Communication Business Consulting, but the relationship doesn't have to be confrontational. "Just deal with us like you would with any other company instead of thinking that the triads are going to come and break your arms." The truth is, if you're less than frank in what you tell debt collectors, they'll soon find out. They have heard every excuse. They know every trick. They have all the time in the world. And while you won't be subjected to violence, at least not from a legitimate agent, you will find new meaning in the word relentless.

Managers at companies that owe money typically have stock replies, says Rozario: 'I promise I will pay'; 'I have already paid'; and 'I don't have to pay this.' The first is easy, he says. "When they promise to pay, you tell them when. And if they don't pay, you follow up and follow up - you never let them go." The second requires only a brief check. And in the third case, if they dispute the claim, that's when a collector earns his percentage. Rozario says the key is to show that the consequence for not paying is worse than paying. In the debt collection business, this is known as leveraging. For example: a company owes US$500,000. That company has US$5 million worth of property listed on its balance sheet. If the company doesn't pay, it ends up in court. The creditor will get a judgement and a charging order. In a falling property market, the creditor might wait until the market hits bottom, then charge the property, plus interest, plus legal fees, plus any compensation they can get. Result: the company risks losing US$5 million on a US$500,000 claim.

Not surprisingly, claims against bad debts are up about 30 percent in 1998 in Asia and the collection industry itself is booming. Debt recovery rates, however, are lower than in 1997. The problem: a CFO may have all the will in the world to pay off or service the company's debt, but without sufficient cash, it doesn't matter. In today's bleak economy, that means there is considerable room for negotiation. Deborah Ho, Dun & Bradstreet's director of receivable management services in Hong Kong, says that creditors are generally willing to accept longer repayment schedules - some as long as three to five years. "They see it as better than nothing," she says. Ho also says there's an increase in the number of debtors who say they will pay if - and when - Dun & Bradstreet can collect on their own overdue accounts receivables. Others will offer goods or merchandise in lieu of cash, says Ho. If the creditor won't accept them, Dun & Bradstreet will find a buyer. Debtors who have cash, though, usually are persuaded to hand it over when threatened with blacklisting or, worse, a ratings downgrade by Dun & Bradstreet's powerful rating agency, Moody's Investors Services. "It [Moody's] is an important source of power when collecting debt," says Lo.

"When a fellow says, 'It ain't the money but the principle of the thing,' it's the money." - Unknown

For a lot of finance managers, the      experience of unmanageable and      overwhelming debt is new. Few companies set out to incur debt without the intention of repaying it. For debtors who wish to pay but have insufficient means, there appear to be a few options. Some companies simply renege on the amount owed. Others ask that the debt be forgiven in part or in whole. Still others restructure the debt with a different payment and time scheme. And a great many companies actually do repay the debt in full, often by implementing cost-cutting measures and working capital management that wrings cash from their operations.

Of course, corporations - struggling or otherwise - can also be creditors, whether to vendors, suppliers or customers. A recent survey by the Hong Kong Export Credit Insurance Corp. (ECIC) revealed that more than two-thirds of exporters said they'd experienced difficulties getting trading partners to repay credits in the last three years. As a result, 28 percent of those exporters have simply stopped trading on credit.

That may not be the best approach. According to the ECIC's commissioner Thomas Yiu, the solution is not to cut off credit, but rather to protect against losses through better credit management. One strategy is to outsource debt recovery. This lets someone else be the bad guy and maintains a company's relationship with suppliers and vendors.

Take Joseph Lee. Lee, the director and finance officer for disaster recovery firm Steamatic Hong Kong Limited, says he's used a debt collection agency more than a dozen times in the past year. Being owed money, says Lee, is a depressing and worrying thing, even if the debt isn't always crucial to the company's survival. "Some debtors complain about turning over their debts to a collector," he says, "but I just tell them it's too late now. You shouldn't have thrown our notice letters in the rubbish bin." Remarkably, Lee says that 90 percent of the company's debts have been recovered in full within two weeks.

Corporate creditors whose cash needs are even more pressing might consider factoring. Factoring differs from debt collection in that a company receives cash up front from a collection agency, typically an advance of up to 80 percent of the debtor's balance. In return, the creditor agrees to pay the agency a fee, typically between 5 to 8 percent of the debtor's book. "The idea is you sacrifice some claims to cash in order to stay afloat in the short term," says Hong Kong University's Petty. For companies with a lot of debt and uncertain payment schedules, factoring can shorten the operating cycle by providing cash in as little as 24 hours instead of 90 days. That means companies can take advantage of purchase discounts elsewhere that effectively cancel out the cost of factoring. It also gives a greater certainty and predictability to cashflows. Says Petty: "It's not profitability that keeps companies going. It's liquidity management and solvency issues that keep companies afloat."

"When I have nothing to do at night and I can't think, I always iron my money."
"What do you press when you're broke?"
"When I'm broke, I press my pants." - Robert Mitchum to Jane Russell in His Kind of Woman

We'll call him Mr. Chan. He wears a suit cut straight from a tailor's dream and speaks with a voice as soft as sponge cake. For all that, he is obviously ill at ease and anxious to keep a low profile. With good reason. Mr. Chan has come to CFO Asia's offices because his own place of business is under siege. Caught in the banks' credit squeeze, his company was unable to find financing for new projects in an industry that is dependent on credit for its survival. It has been almost a year to the day since his firm called a bankers' meeting to inform them that business, to put it mildly, was bad. On the day of the announcement, Chan, as director of the publicly listed contractor with close to US$130 million in sales in 1997, saw his business deteriorate almost overnight. Since then, he has filled his days with seemingly endless meetings. "It is still a very heavy workload. I'm constantly at meetings with bankers, creditors, lawyers and accountants - it's very unpleasant," he complains.

Unpleasant, but a duty that must be performed. Chan explains that with no sales and no operations his sole function is to get as much money back to the creditors as possible. His first move, after breaking news of the company's difficulties, was to hire a financial consultant - with money borrowed from friends and relatives. He notes with some regret that not many managers in the region, himself included, have experience in a company that's going down. Therefore, he laments, his choice of financial advisor may not have been the best. Since the advisor's main motivation is to earn a fee based on billable hours, Chan says it is in the advisor's best interests to drag the proceedings out. Initially, Chan's main interest in hiring the consultant was to find a white knight for the company. But he cautions that here, too, the consultant may have another agenda. "He may have friends in the same field as your firm who are looking to pick up a company cheaply."

Luckily for Chan, it appears a rescuer has been found. If the deal is finally finished, Chan says his first feeling will be of relief and the second, concern that he will be without a job and without money. "Maybe I could get a job as a financial consultant after all this experience. After all, at least they get their fees up front."

Steven Crane is a senior writer at CFO Asia.