Prachai Leophai ratana

History of TPI

Prachai founded Thai Petrochemical Industry in 1978, based on companies his grandfather founded during World War II. Thai Petrochemical Industry (TPI) group began in rice milling, and had extended its business to gunnysacks, textiles, and insurance in the second generation. In 1979, the group consisted of nineteen firms still based mainly in agriculture-related sectors. The patriarch of this second generation, Pornchai Leophairatana, sent his sons to the US to study accounting, economics, and engineering. Returning to Thailand in the era when the economy was shifting decisively towards industry using newly found supplies of natural gas, Prachai Leophairatana and his five siblings launched the firm into cement and petrochemicals.

In the 1990s, Prachai expanded TPI with massive offshore loans to take advantage of the then interest rate gap between the Thai baht and US dollar. Most of the loans were not hedged because, as Prachai put it, "the Thai government had pledged the baht peg would be defended". The peg was around 25 baht to the US dollar. By the mid-1990s, TPI firms had expanded to forty-four and total revenues had multiplied twenty-five times. TPl had risen rapidly to second rank in the cement market, behind Siam Cement. It had also become a major player in the booming petrochemicals industry. By 1994, it had become Southeast Asia's first fully integrated petrochemical company. TPI invested in wharf and handling facilities on Thailand's eastern seaboard, built a 100-megawatt power plant, owned a cement company and opened its own gas stations.

The demise of TPI

The baht, however, proved vulnerable. Under speculative attack, its defences crumbled. The Thai currency was floated on 2 July 1997. By January 1998, the baht exchange rate had shot up to 56 to the US dollar. With TPI's total loans reaching US$3.8 billion, its creditors - led by Bangkok Bank - decided to get tough. In early-2000, Thailand's bankruptcy court approved the creditors' debt restructuring plan and appointed Australia-based Effective Planners as the plan administrator. The plan called for a debt-to-equity swap of US$756 million and the sale of non-core assets to raise US$200 million. Many thought that would spell the end of Prachai, who had effectively turned one of the region's largest petrochemical complexes into Thailand's biggest corporate debtor. But it didn't. Prachai refused to budge. He stayed on as TPI's chief executive and, for a while, even reported for work every morning. He also besieged the court by filing more than 35 different legal challenges against the plan and Effective Planners. The latter had to spend millions of dollars to fend off litigation. Although most of the lawsuits were dismissed, Prachai has always maintained he was not fighting for himself but for TPI and its workers. The workout plan slashed the Leophairatana family's stake in the company to 15 percent, down from 60 percent.

Prachai, on 21 April 2003, scored an important victory in the bankruptcy court. The court ordered the removal of Effective Planners as TPI's plan administrator and appointed Prachai as a temporary replacement instead. In response, the creditors suspended US$80 million in working capital facilities vital to TPI. Just a few days prior to the 21 April judgment, creditors had voiced their support of Effective Planners, even though, as Prachai pointed out later, it had failed to meet most of the targets outlined in the debt rehabilitation plan.

Effective Planners was expected to incur expenses not exceeding 640 million baht in the 2001-2002 fiscal year (1 April 2001 to 31 March 2002), but as Prachai told the court, the sum was closer to 1.57 billion baht. Also, under the plan, the company's oil refining capacity was targeted to hit 125,000 barrels per day by the end of the fiscal year. But by the start of April 2002, the TPI refinery was producing only 82,000 barrels per day. The court rejected Effective Planners' defence that the operating environment for TPI had worsened considerably following the 11 September 2001 terrorist attacks in the US. Instead, in a highly unusual move, it recommended that the debtor side be adequately represented on a new steering committee.

The Thai government stepped in by saying it would help mediate in the matter and proposed the appointment of a chairperson acceptable to both sides to lead the new steering committee consisting of seven representatives each from the creditor and the debtor sides. "The Thai bankruptcy law is very clear. On the control of reorganization, creditors have final say.... The debtor has to be cooperative, and really has a minimal role to play," says Kowit Somwaiya, partner at Herbert Smith in Thailand. But Kowit says it was within the discretion of the court to recommend a joint panel consisting of representatives of both sides. "Someone is needed who can bring both sides half way, someone Khun Prachai can trust."

Creditors allowed one Prachai representative and one governmental representative to sit on the new steering panel, which would otherwise consist only of the members of Thai Administrators Ltd (TAL). The 13 June judgment appointing the Finance Ministry as TPI's debt administrator is seen as limiting creditors' future course of action. TAL was seen as the best hope for creditors as it consists of formidable members of Thailand's business and legal community.

Proposed by creditors as the debt plan administrator, TAL was rejected outright by Prachai. And in its 13 June ruling, the court said TAL's plan appeared to be inadequate to create the cash flow needed to service TPI's debt. The company was obliged to make interest payments of around US$8.5 million every month.

The court, it seemed, had transferred responsibility to the state. "We had proposed to mediate in setting up a joint panel which would appoint financial advisors to conduct due diligence so that a [new] debt restructuring plan could be proposed," said Kitti Limsakul, an advisor to Thailand's finance minister, before the June 13 ruling. "But we respect the right of the creditors." Kitti said the government would not act unless directed by the court.

In what would be a clear sign of things to come, the court had already signalled its approval of a government role in the crisis. Judge Kamol Teeravetponkul of the Central Bankruptcy Court on 21 May 2003 said that the businesses run by TPI were too big to be nursed back to health by the private sector. "The appointment of a tripartite debt administration team as suggested by the government is good solution," Reuters News Agency quoted Kamol as saying. Two weeks earlier, Prime Minister Thaksin Shinawatra himself proposed that a third party be appointed to mediate in the matter. It was Kamol who delivered the 13 June ruling.

Most financial experts have given a thumbs down to what they see as intervention by the state. "It seems the prime minister is getting involved in a micro level. This is a step backward," said a Hong Kong-based credit analyst at a European bank. The analyst, like his many of colleagues in the industry based outside Bangkok, see the resolution of the TPI case as a litmus test for the restructuring of billions of dollars worth of Thai corporate debt and crucial to Thailand's ability to attract and retain foreign investment.

Observers, based in the Thai capital, however, are more tempered. "The TPI case is very unique," Kowit explains. "First the amount involved, US$3.8 billion, is huge. Second, the company's labour union [who have mostly supported Prachai] is very strong. And lastly, the creditor side involves some of the largest domestic and foreign institutions." Kowit also says many in Thailand were surprised that the rehabilitation plan did not permit any haircuts and that the creditors could take 75 percent equity in the company through conversion of accrued interest of US$756 million in only three years. Prachai has repeatedly accused the lenders of not paying enough attention to the long-term viability of the company and focusing primarily on maximizing short-term returns.

Speaking after the 13 June judgment, Kitti Limsakul, the advisor to Thailand's finance minister, told Dow Jones Newswires that an earlier proposal to set up a 15-member tripartite debt administration team consisting of seven members each from the creditor and debtor side, headed by a mediator from the government had been modified. Now, the finance ministry is willing to permit unequal representation of the two sides, depending on who is suitable. With the 2005 ruling, Prachai was forced to sell his and his family's stock at 70 percent below the market price at 3.30 baht per share to the recently privatized petroleum corporation PTT Public Company Limited (PTT). Subsequently Prachai and his siblings were ejected from the board, and were replaced by PTT nominees.

Prachai Leophairatana and his family were able to retain a small portion of their wealth, and now are the board members of the TPI Polene Public Company Limited, which recently was just released from rehabilitation plan on Tuesday, 11 April 2006.