1 month ago
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PETALING JAYA: As businesses struggle against the Covid-19 pandemic, battling revenue losses, rising borrowing costs and declining cash flows, AmBank Research (AmResearch) pointed out that this is an opportune time for businesses seeking corporate restructuring to embark on a debt–for-sustainability swap.
“Focusing on a debt-for-sustainability swap may offer the companies an avenue to address corporate debt challenges while at the same time increasingly focus on sustainability,” the research house said in a report.
Despite banks proactively engaging with their customers and working with the businesses, concerns remain whether some of the borrowers will still be able to meet their obligations.
AmResearch opined that those severely inflicted by the pandemic will embark on a financial restructuring route while others may need to recapitalise their businesses.
“Coronavirus fears have consumed investors as warnings over the potential of a rising debt load that could push companies towards collapse are beginning to be tested,” said AmResearch.
Even if policymakers put health concerns as the top priority, it suggested that plans on how to deal with unsustainable corporate debt burdens should start almost immediately. As such, taking such measures now will limit the number of bankruptcies and business closures, translating into a quick recovery from the recession.
The research house laid out that it is essential for companies to embed sustainability in their long-term recovery and growth plans. Simultaneously, it needs to overcome obstacles to repurpose assets and capabilities for post-pandemic markets.
In the post-pandemic world, companies need to reinvent their business models in favour of more sustainable options – an approach that will not only help them weather the current environment, but also provide a competitive advantage, in order to mitigate risks, capture opportunities and shape their future.
“Companies should rethink their goals in an environment that increasingly values resilience, sustainability and inclusiveness.”
AmResearch said they should use the crisis as an opportunity to review how their business models fit in the broader context of sustainable development goals.
Post-pandemic, it opined that companies need to implement long-term sustainability strategies that allow them to capture new opportunities, broaden their horizon and shape their future.
“Focusing on a debt-for-sustainability swap may offer the companies an avenue to address corporate debt challenges while at the same time increasingly focus on sustainability,” it said.
“In pursuing the debt-for-sustainability swap in the context of corporate debt restructuring, an option is to have a government-sponsored corporate debt restructuring fund.”
AmResearch elaborated that the fund would buy from the banks all non-performing loans from viable firms. Subsequently, the fund and firms would then exchange the loans at a prearranged discount from the purchase value of the debt with a new loan based on sustainability compliance in the firms’ operations or supply chains.
However, with this option it acknowledges that it is important for the government to take into consideration of its fiscal space – limitations as well as debt sustainability concerns particularly with the record spending over the past few months.
The research house suggested an alternative approach that would leverage bilateral and multilateral development finance institutions, private investors and private equity funds, to reduce the strain on the government’s limited financial resources.
“In both scenarios, it could be done through a sustainability-linked loan (with measurable performance targets), a transition loan (supporting green business practices) or other green instruments (such as green bonds).”
Furthermore, in formulating the debt-for-sustainability swap framework, AmResearch stressed the importance of setting objectives to enable a timely restructuring of debt and access to sustainability financing for viable firms.
“The government should also facilitate the exit of non-viable businesses to avoid the rise of ‘zombie’ firms. Identifying which firms are viable in the long run is no easy task, however. The government should work closely with banks – which are experienced in carrying out such assessments – to gather detailed data on firms and sectors.”
English (United States)