Thinking that a rolling loan gathers no loss, major tidal waves of debt restructuring activities have been the board agenda of several corporations for many months. Many firms are trying to find new ways to swim out of the crisis marked by liquidity issues in the face of highly geared balance sheets. The more recent one being that of Azgard Nine Limited.
"But there are lots of ANLs out there", one senior asset management executive told BR Research last week, highlighting that almost 40 percent of the A-rated Term Finance Certificates defaulted in the last couple of years.
On the face of it, tough business situation could easily be blamed. Since, thats half the truth, companies must now learn from the boom-bust cycle of the last decade - making well calculated business decisions while choosing their debts wisely.
But there are lessons to be learnt by the overall financial industry; the rating agency, the regulator, the courts which deal with finance and banking issues, and also the investors.
Industry players often cite the need for higher rating standards. "I think a bad economic environment is the reason behind these debt defaults, but I think at the same time rating agencies need to improve their standards," says Amjad Waheed, CEO of NAFA Funds, citing the need to be proactive than being reactive.
Likewise, the SECP needs to step up its vigilance.
In some cases, companies can easily defer their TFC repayments on the basis of a nod given by a simple majority (51 percent) of TFC holders, which at times are actually their major sponsors. This leaves smaller debt holders in jeopardy, leaving them with little option but to comply.
Reportedly, some don even invite their small stakeholders in meetings where debt restructuring plans are presented.
In other cases, the trustees are in a precarious financial situation themselves; a more recent example of which is First Dawood Investment Bank Limited which is a trustee for ANLs TFC, but is on a transition to default with poorest long-term entity rating.
Then there is the absence of efficient courts that effectively provides these firms a strong bargaining power.
Technically, a bondholder can go to the courts if an entity defaults, whenever it is a bank or other TFC holders, "the options are limited because if they go to the courts it would take ten years," according to Waheed.
One could say that eventually the market will penalize such companies, but thats a high cost process. Instead, if the first violator is dealt toughly by the courts, then others might think twice.
Yet at the end of the day, its the investors money; and if they remain docile then so would the authorities. If one investor doesn have the resources to get the authorities moving, united they could have the funds and the necessary clout to get things done. Are they up to it?