AmBank Research has suggested that businesses seeking corporate restructuring amidst the current challenging economic landscape should consider embarking on a debt-for-sustainability swap to spur recovery. This is because the measure will offer companies an avenue to address corporate debt challenges while focusing on sustainability.
In the latest Thematic report, AmBank Research explained that there will be a substantial emphasis on sustainability as recovery takes place in the post-Covid-19 world. As such, companies will need to implement long-term sustainability strategies that allow them to capture new opportunities, broaden their horizon, and shape their post-pandemic futures. Survival alone is not enough in the setting of this new normal, said the research house.
“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,” AmBank Research went on to elaborate. In this scenario, the fund will buy the non-performing loans belonging to viable companies from banks. Following that, the companies can then service their “new” loans at a prearranged discount (from the purchase value of the debts), provided that they comply with sustainability regulations in their operations or supply chains.
In opting for this alternative, however, it is crucial that the government takes into consideration its fiscal space, limitations, as well as debt sustainability concerns – particularly with the record spending that has been carried out over the past few months.
Another option proposed by AmBank Research is a well-designed approach that would leverage bilateral and multilateral development finance institutions, private investors, and private equity funds. With this, the government will be able to reduce the use of its 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),” AmBank Research further explained.
The research house also said that in designing the debt-for-sustainability swap framework, the government needs to set objectives that will enable a timely restructuring of debt and access to sustainability financing for viable companies. “The government should also facilitate the exit of non-viable businesses to avoid the rise of ‘zombie firms’,” it said. To clarify, zombie firms are companies that earn just enough to continue operating, but are unable to cover their debt servicing costs.
AmBank Research further noted that it will not be easy to identify companies that are viable in the long run. As such, the government should work closely with banks to gather detailed data on companies and sectors as these institutions are experienced in carrying out such assessments.