Debt restructuring supports troubled companies<\/p>\n
By Candelario Tambis<\/p>\n
JAKARTA (JP): From mid-1997 up to today, many companies have
\nbeen in financial trouble because of the lingering economic
\ncrisis. Financial difficulties of distressed companies are caused
\nby a variety of reasons, however, in a time of crisis these
\ncompanies share one common survival alternative -- debt
\nrestructuring.<\/p>\n
In the language of the ordinary people on the street, debt
\nrestructuring is a process of finding possible solutions to the
\nquestion of how an existing debt may be restructured and replaced
\nby a new debt arrangement with creditor's approval.<\/p>\n
The definition may be simplified through an illustration
\nwhereby a certain debt is restructured by means of rescheduling
\namortization payments (extending the payment periods from two
\nyears to six years), and by revising the terms (for example,
\nchanging the interest rate downwards, from 30 percent to 24
\npercent per year).<\/p>\n
Debt restructuring is not always restricted to this simplistic
\nexample. In the language of corporate finance, there are other
\nmore sophisticated options available "to reduce, to delay, and\/or
\nto eliminate contractual obligations". The main thrust of the
\nprocess is to pick the appropriate debt structure that affords
\nthe distressed company the most realistic opportunity to meet its
\nobligations. Once the restructured debt arrangement is agreed
\nupon, the debt-ridden company must select the appropriate
\nfinancial structure which most closely supports the strategic
\ndirection of the business, otherwise, it would not be easy for
\nthe debt restructuring plan to succeed.<\/p>\n
Debt restructuring is not an easy task. Due to the huge amount
\nof Indonesian corporate debts, a facilitator is deemed necessary
\nto assist in the restructuring process. In this capacity, the
\nmovement launched by The Jakarta Initiative is highly laudable
\nand merits the support of creditors and debtors alike. The
\ninitiative aims to promote prompt and accurate debt-handling, by
\nrequiring debtors to register with and report to the organization
\nfor a debt restructuring process. As debt restructuring builds
\nmomentum, it is expected that The Jakarta Initiative will also
\nserve as the national watchdog for "enforcement responsibilities
\naimed at establishing a national system of debt restructuring
\ntogether with a system for the nationwide clearance and
\nsettlement of corporate debts".<\/p>\n
From the perspective of the debtors, companies are perceived
\nas national assets which play an important role in the country's
\neconomic wheel of progress. Liquidation attempts should be de-
\nemphasized during the debt restructuring process, unless the
\ncompany concerned is really worth more "dead" than "alive".<\/p>\n
In this context, debtor-companies need some kind of
\nresuscitative privilege while the restructuring process is on-
\ngoing so they can concentrate on negotiating their case with
\ntheir creditors.<\/p>\n
The price for this privilege is the willingness of debtors to
\nparticipate and cooperate in the process by disclosing all
\nrelevant data and information about their operations and the
\nfuture financial prospects of their businesses. They must bare
\ntheir financial soul to permit informed analysis by creditors.<\/p>\n
To exercise sound judgment while under strong pressure of
\npossible bankruptcy is nerve-racking, and given an uncertain
\nenvironment, it would be good judgment if the financially
\ntroubled companies would immediately join the debt restructuring
\nprogram. Any further delay would be ruinous in a continuing weak
\nand deteriorating financial situation.<\/p>\n
From the perspective of the creditors (who are mostly
\ncommercial banks), they are perceived as partners in development,
\nand advance together with their clients. This partnership
\nencompasses a number of prerequisite requirements of strict
\nreturn-criteria through qualitative and quantitative analysis.
\nNeedless to say, creditors are presumably cognizant of the
\nproblems currently faced by their debtor-clients.<\/p>\n
Hence, creditors are expected to refrain from making
\noverwhelming demands that would only exacerbate the already
\nproblematic situation. Like their debtors, creditor-banks should
\nexhaust all possible avenues to solve the debt problem on a win-
\nwin basis; failure to do so would be mutually unprofitable for
\nboth creditor and debtor.<\/p>\n
In anticipation of major disagreements occurring during the
\ndebt restructuring process, the presence of The Jakarta
\nInitiative as a government facilitator is of paramount
\nimportance. Disagreements can range from the use of different
\ndiscount rates to predicting cash flows related to amortization
\nand interest payments. Questions may arise in relation to what
\nconcession to give to borrowers, and questions on what incentives
\nexist that borrowers are prepared to give to creditors.<\/p>\n
Debt restructuring is a serious exercise and it should be
\naddressed with the vigor of a standard business review
\ninvestigation. It should disallow constituent parties to
\ndillydally with the issues. Should a negative attitude be
\ndisplayed by a participating debtor-company, the facilitator must
\nmove to put into immediate effect the government policy on debt
\nrestructuring -- that is, foreclosure and bankruptcy proceedings.<\/p>\n
Debt restructuring initiatives have been on-going for almost
\none year, and yet significant results, particularly in the real
\nsector, are yet to be realized. Of course, some degree of success
\nin the banking sector has been partly realized because of
\nexternal as well as internal pressures. What people really need
\nis an overall debt restructuring plan to include small to medium
\nsize companies, for which the impact on society is greatest.<\/p>\n
Debt restructuring is a survival tool for financially troubled
\ncompanies. As previously mentioned above, if the company is worth
\nmore "dead" than "alive, then it must be liquidated without
\nfurther ado.<\/p>\n
However, if the company's valuation is affirmative, then it
\nmust be given a chance to recuperate by participating in the
\nprogram initiated by The Jakarta Initiative.<\/p>\n
An effective debt restructuring process should include but not
\nlimit itself to the following elements: 1) the presence of a
\nproactive facilitator; 2) willingness of debtors and creditors to
\nparticipate and cooperate wholeheartedly; 3) a comprehensive
\nbusiness review investigation of distressed companies that need
\nrestructuring; 4) public disclosure of results of the business
\nreview investigation, if the distressed company involved is
\npublicly listed; and 5) inclusion of an independent director
\n(non-executive) in a distressed company's board of directors who
\nwill be required to act as chairman of the distressed company's
\naudit committee.<\/p>\n
The writer is an investment adviser based in Jakarta.<\/p>", "url": "https:\/\/jawawa.id\/newsitem\/debt-restructuring-supports-troubled-companies-1447893297", "image": "" }, "sponsor": "Okusi Associates", "sponsor_url": "https:\/\/okusiassociates.com" }