Tisco warns of firms in rehab
Investing in companies undergoing business rehabilitation comes with high risk because of uncertainty over the rehabilitation process and the reduction in capital, according to Tisco Securities.
In the midst of the Covid-19 pandemic and reduced lockdown measures, economic activities of many business sectors have inevitably slowed, especially the services sector.
Although these business sectors are trying to adapt to survive, it is projected many firms will either close or undergo business rehabilitation after filing for bankruptcy because of a lack of liquidity and accumulated losses, said Tisco Securities.
Businesses with weak financial positions will have higher debt than assets, or negative shareholder equity.
While filing for bankruptcy and undergoing business rehabilitation is a means of survival, it is painful for shareholders because the rehabilitation process generally reduces the registered capital until almost nothing is left, with existing shareholders responsible for incurred damages.
There will be negotiations with creditors later, along with guidelines for business rehabilitation and debt restructuring.
Reducing the registered capital to nearly zero has a significant impact on the share price. This is because, in theory, it means the stock has almost no value at all.
It is not a surprise there is a history of share prices continuously tumbling to almost zero when listed companies enter the business rehabilitation process, said Tisco Securities.
This reflects the risk of capital reduction and the uncertainty of the rehabilitation plan.
Guidelines for business rehabilitation and debt restructuring may cover extending the debt repayment period, remission of interest payments, reducing a portion of the principal payment or a haircut, debt-to-equity conversion and a capital increase to the existing shareholders or new shareholders.
Details ultimately depend on each company's business rehabilitation plan.
From Tisco Securities' data collection since the 1997 Tom Yum Kung crisis, there have been 52 companies listed on the Stock Exchange of Thailand filing for business rehabilitation via the Bankruptcy Court.
These include 20 companies that failed to rehabilitate their businesses and have been withdrawn from listing on the stock exchange, and nine firms remaining in rehabilitation with their stocks suspended from trading.
The other 23 companies successfully rehabilitated their businesses and resumed trading.
It takes around seven years to rehabilitate businesses on average.
Investing in shares where companies are undergoing business rehabilitation carries a very high risk, both in terms of losing the entire investment sum from capital reduction, or failure to rehabilitate, said Tisco Securities.
Investors should carefully study investment information before making decisions and invest according to their risk acceptance level, said the brokerage.