‘Debt–for-sustainability swap’ way to spur recovery

IN today’s COVID-19 impacted reality, it is essential for companies to embed sustainability in their long-term recovery and growth plans.

This is because emphasis on sustainability will inevitably take centre stage in a post COVID-19 world.

To survive and thrive in a post-COVID-19 environment, companies need to implement long-term sustainability strategies that allow them to capture new opportunities, broaden their horizon and shape their post-pandemic futures, according to AmBank Research chief economist/ research head Dr Anthony Dass.

“In this new normal environment, survival alone is not enough,” wrote Dass in a Malaysia: Debt-for-Sustainability Swap to Spur Recovery report. “This is an opportune time for businesses seeking corporate restructuring to embark on a debt–for-sustainability swap.”

In pursuing the debt-for-sustainability swap in the context of corporate debt restructuring, Dass noted that an option is to have a government-sponsored corporate debt restructuring fund.

“Such fund would buy from the banks all non-performing loans from viable firms,” he explained.

“The fund and firms would then exchange the loans at a pre-arranged discount from the purchase value of the debt with a new loan based on sustainability compliance in the firms’ operations or supply chains.”

For this option to work, Dass said it is important for the government to consider its fiscal space – limitations as well as debt sustainability concerns – in view of record spending over the past few months.

Another alternative will be a well-designed approach that would leverage bilateral and multilateral development finance institutions, private investors and private equity funds.

“This is to reduce the use of limited government financial resources,” suggested Dass.

In both scenarios, the swap 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).

In designing the debt-for-sustainability swap framework, Dass stressed the need for the government to set objectives that will 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,” admitted Dass.

“The government should work closely with banks – which are experienced in carrying out such assessments – to gather detailed data on firms and sectors.” – Dec 18, 2002

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