THE WORLD BANK CONFERENCE ON “CORPORATE RESTRUCTURING: INTERNATIONAL BEST PRACTICES” THE ROLE AND PROGRESS OF

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

2. OVERVIEW OF ASSET MANAGEMENT COMPANIES (AMCs)

3. 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

4. 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 ASSET MANAGEMENT COMPANIES (AMCs)

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

6. 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 ADVANTAGES OF AMCs

7. 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…... IN SUMMARY

8. MALAYSIA’SBANKING SECTOR RESTRUCTURING PLAN

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

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

11. DANAHARTA:ROLE & ORGANISATION

12. Neither 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) THE AMC CONTINUUM Types of AMCs Warehouse Agency Rapid Disposition Agency Asset Management Company

13. 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

14. DANAHARTA’S PROGRESS THROUGH PHASES Management Establishment Acquisition • 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 onwards June ‘98 Sept ‘98 June ‘99

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

16. CORPORATE INFORMATION 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)

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

18. 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

19. 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 THE DANAHARTA ACT 1998

20. 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 APPOINTMENT OF SPECIAL ADMINISTRATORS

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

22. 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 discharged 80 2) Workout proposal implemented, SAs pending discharge 12 3) Workout proposal approved by authorities, being implemented 16 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 proposal 15 SPECIAL ADMINISTRATORS APPOINTED

23. 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 THE DANAHARTA ACT 1998

24. 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 TRANSPARENCY AND DISCLOSURE

25. ACQUISITION PHASE

26. 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) MECHANISMS

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

28. MANAGEMENT PHASE

29. LOAN RESTRUCTURING • Informal • rescheduling • redemption • settlement • Formal • s.176 • SA LOAN DISPOSAL Sale of Loan via BID PROCESS Yes No Yes No MANAGEMENT APPROACH NPLs Loan Management Asset Management VIABLE LOANS NON-VIABLE LOANS FOREIGN LOAN ASSETS • ASSET RESTRUCTURING • Sale of collateral • foreclosure • R&M • liquidation • Sale of Business • SA • via BID PROCESS Recovery Recovery • Management of Assets • property • business • VALUE ENHANCEMENT Management of Securities VALUE ENHANCEMENT S A L E T O M A R K E T

30. 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 MANAGEMENT- Loan Restructuring

31. 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 Restructuring Principles

32. 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 LOAN MANAGEMENT- Asset Restructuring

33. PROGRESS OF DANAHARTA

34. TIMELINE Receive share capital from Government Issue Government- guaranteed bonds June 1998 - March 2000 Acquire NPLs Receive NPLs to be managed Sep 1998 - Dec 2001 NPL Portfolio Nov 1998 - Sep 2002 Determine recovery strategies Implement recovery strategies Receive non-cash assets - securities, properties and restructured loans Receive cash 1999 - 2005 Convert to cash/ residual assets Cash/ residual assets Distribute to Government/ surplus recovery to respective financial institutions End 2000 - 2005 31 Dec 2003 - 31 March 2005 Redeem bonds. Any shortfall will be borne by Government

35. NPL PORTFOLIO

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

37. ANALYSIS OF RECOVERY PROCEEDSBY 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 = USD0.263 767 borrowers have fully settled RM14.58 bil (LRA) of NPLs, relating to 881 accounts

38. ANALYSIS OF THE CONVERSION OFNON-CASH ASSETS RECEIVED as at 31 December 2003

39. RM billion Cash from recovery proceeds 16.16 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) 19.04 ANALYSIS OF RECOVERY PROCEEDSTotal cash received as at 31 December 2003 Note: RM1 = USD0.263 Acquired loans RM6.08 bil Managed loans RM12.96 bil

40. DISTRIBUTION OFRECOVERY PROCEEDS as at 31 December 2003

41. SUMMARY OF CASH STATEMENTas at 31 December 2003

42. STATUS OF DANAHARTA BONDSas at 31 December 2003

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

44. Information on Danaharta can be found at www.danaharta.com.my