Hong Kong Approach to Corporate Difficulties

19 November 2008

The Chief Executive
All authorized institutions

Dear Sir/Madam,

Hong Kong Approach to Corporate Difficulties

In view of the current economic environment, I write to remind authorized institutions (AIs) of the need to continue to follow the "Hong Kong Approach to Corporate Difficulties" (Hong Kong Approach) in dealing with customers experiencing financial problems.

The Hong Kong Approach was jointly developed by the Hong Kong Monetary Authority and the Hong Kong Association of Banks. It lays down clear guidelines on how AIs should handle situations where a corporate customer, who has borrowed from more than one institution, runs into financial troubles.

The HKMA is a strong supporter of the Hong Kong Approach, which proved to be conducive to the successful conclusion of many corporate workouts during the Asian Financial Crisis. The HKMA expects all AIs to observe the Approach in dealing with corporate customers in financial difficulties. It is prepared to act as a mediator between the parties involved if differences of views threaten a workout.

One of the key guidelines specified in the Hong Kong Approach is that AIs' initial attitude should be one of support when it becomes generally known that a borrower is experiencing financial problems. AIs should not withdraw their existing facilities or hastily put the borrower into receivership, or issue writs demanding repayment. Instead, they should endeavour to ensure that the borrower has sufficient liquidity to continue trading until a considered view of its prospects can be reached. This guideline is particularly relevant under the current economic climate and should be given due consideration by AIs.

As the Hong Kong economy continues to be affected by the global economic slowdown, it is likely that an increasing number of corporate customers may encounter difficulties in servicing their debts. Where corporate customers experience financial stress, AIs should remain supportive and be prepared to consider customers' requests for temporary relief arrangements, such as extensions of repayment deadlines. In the event that a debt restructuring is necessary, AIs should follow the Hong Kong Approach and cooperate with other institutions involved in identifying a workout plan acceptable to all stakeholders.

Yours faithfully,

Y.K. Choi
Deputy Chief Executive