Settling the foreign debt snag<\/p>\n
By Laksamana Sukardi<\/p>\n
JAKARTA (JP): Indonesia's private foreign debt burden must be
\ndealt with expeditiously. One of the most important prerequisites
\nfor recovery of the Indonesian economy is the settlement of this
\ndebt incubus. It is regrettable that thus far there has been
\nlittle significant progress in settling Indonesia's private
\nforeign debt problem. This is due to the complexity of the
\nmatter, requiring a solution that is acceptable to all parties
\ninvolved.<\/p>\n
The facts listed below should form the appropriate foundation
\nin reaching a common framework that can be used to restructure
\nthe private foreign debt:<\/p>\n
* Foreign creditor banks will use all means at their disposal in
\ntheir effort to get maximum repayment on debt.<\/p>\n
* Indonesian corporate debtors are attempting to reduce their
\ndebt burden by claiming there has been a force majeur. Moreover,
\nthey are hoping that foreign creditors will forgive their debt or
\nthat the Indonesian government will bail them out.<\/p>\n
* The countries funding the IMF are unwilling to allow the funds
\nprovided to Indonesia to be used to bail out private foreign
\ndebt.<\/p>\n
If the IMF and the Indonesian government do not become more
\ninvolved in settling the matter of Indonesia's private foreign
\ndebt, it will drag on in such a way that all parties will lose.<\/p>\n
The Indonesian people will not accept having private foreign
\ndebt obligations falling on the Indonesian government.<\/p>\n
These facts make evident how very difficult the challenge is
\nto find a solution that will be acceptable to all parties
\ninvolved. Therefore, any solution that is fair and workable is
\ngoing to have the following characteristics:<\/p>\n
- The Indonesian Debt Restructuring Agency (INDRA) must be fully
\nindependent.<\/p>\n
- Members of INDRA's facilitating team must not have any
\nconflicts of interest or vested interests, meaning they should be
\nneither government bureaucrats nor persons directly involved in
\nborrowing and lending. This team must be composed of independent
\nprofessionals in the areas of finance and banking.<\/p>\n
- Loans that were made based on principles of prudent lending
\nand due-diligence should be handled differently from loans based
\non reckless lending involving collusion, corruption, and
\nnepotism.<\/p>\n
- Private Indonesian firms that borrowed in unprofessional ways
\nor diverted borrowed funds for personal use should be handled
\nthrough the proper criminal legal channels, while those that
\nborrowed in a professional manner and in accordance with
\nprinciples of prudence should be given maximum assistance.<\/p>\n
There can be no such thing as a free lunch.<\/p>\n
If the government guarantees any private foreign debt, then
\nowners of firms receiving assistance must surrender shares of
\nequal value to the government in return.<\/p>\n
In technical terms, the restructuring of private foreign debt
\nbased on the principles set forth above would consist of the
\nfollowing:<\/p>\n
Classification of Foreign Debt:<\/p>\n
Independent audits of the portfolios of foreign debts as well
\nas the debtors Indonesian companies to determine which ones are
\nproper candidates for restructuring. These audits should be based
\non criteria of how loans were made and used. Based on these
\nindependent audits, all foreign private debt can be assigned to
\neither of two categories:<\/p>\n
Prudent Category: Prudent lending by international banks and
\ncreditors to private Indonesian companies that engage in prudent
\nmanagement of their loan portfolios. Refers to companies that are
\nmanaged professionally and with transparency, and which have
\nreceived foreign loans on the basis of cautious principles,
\nmeaning their financial statements and other supporting documents
\nshow the company's use of loaned funds.<\/p>\n
Reckless Category: Reckless lending by foreign banks and
\ninternational creditors to Indonesian private companies that
\nmanage their loans in unprofessional and non-transparent ways.
\nIn these cases it is evident that corporate managers have engaged
\nin sight streaming of borrowed funds and creditors have violated
\nbasic principles of due diligence in their credit allocations.<\/p>\n
The task of classifying loans into the categories above will
\nbe conducted by highly respected and internationally syndicated
\nindependent auditors.<\/p>\n
Auditors that are already in contractual relations with banks
\nor debtors are forbidden from involvement in the classification
\nprocess.<\/p>\n
If necessary, the classification process can be accelerated by
\nestablishing standard criteria based on check points that result
\nin a scoring system. Based on this scoring system, it will be
\npossible to determine with precision and consistency whether
\nloans qualify for full or partial restructuring.<\/p>\n
The objective of this scoring system is to determine whether
\nthe business activity of the debtor is still viable and whether
\nthe company has the potential to repay its foreign debts. The
\nthree main categories into which corporate debt will fall are:<\/p>\n
1. Low Risk: All of the foreign debt qualifies for restructuring.<\/p>\n
2. Medium Risk: Only a portion of the foreign debt qualifies for
\nrestructuring.<\/p>\n
3. High Risk: None of the foreign debt qualifies for
\nrestructuring.<\/p>\n
Restructuring Program: Prudent Category<\/p>\n
1. Once the independent auditor has assessed the loan
\nportfolio and assigned a categorization based on risk, the debtor
\nshall issue Convertible Bonds (CB\/Obligations that can be
\nexchanged for equity shares).<\/p>\n
2. Foreign debt will be swapped for these Convertible Bonds.
\nIn this way, the fiscal position of the debtor company will be
\nimproved significantly.<\/p>\n
3. A bilateral commitment shall be arranged between countries
\nand multilateral organization such as IMF and The World Bank to
\ncreate a secondary market in these Convertible Bonds.<\/p>\n
For example: The Indonesian and Japanese governments negotiate
\nan agreement in which the Japanese government provides a discount
\nfacility to Japanese creditors (Banks or investors who are
\nholders of the Convertible Bond) through a Special Vehicle
\nsupported by the Bank of Japan and\/or the World Bank.<\/p>\n
This is feasible because the Japanese government has an
\ninterest in assisting Japanese creditors. The Japanese government
\nis also in a more advantageous position than the Indonesian
\ngovernment in mobilizing international funds because the country
\nrisk rating of Japan is much more favorable than that of
\nIndonesia.<\/p>\n
Provisions regarding the conversion rate from debt to
\nConvertible Bonds shall vary with the categorization of risk.
\nThe discount rate of CBs will also be strongly determined by the
\nrisk category of corporate loans. Through this process the
\nrestructuring of foreign debt can proceed through market
\nmechanisms, as the CBs that are swapped for debt will be rated
\nfor purposes of trading on the secondary market.<\/p>\n
4. Indonesian debtor companies will be obligated to make an
\nIPO or rights issue once economic conditions in Indonesia improve
\nor before a pre-arranged deadline. Holders of CBs will then have
\nan opportunity to exchange their bonds for shares, which can be
\nsold on the Jakarta Stock Exchange.<\/p>\n
5. The management of debtor companies must be fully
\ntransparent. Representatives of creditors or holders of CBs shall
\nbe involved directly in the management of the firm.<\/p>\n
Foreign debt classified as \"prudent\" is defined as debt that
\nmeets the eligibility requirements for restructuring. The
\nconditions and action plan set forth above represent a common
\nframework that must serve as the reference point for both
\ncreditors and debtors in all negotiations for restructuring of
\nIndonesian private foreign debt.<\/p>\n
The actual restructuring program for each debtor firm will
\nvary with the type of debt, the condition of the company, and the
\nfuture prospects for the firm. But this \"common framework\"
\nrepresents a general point of departure for achieving a
\nrestructuring of foreign debt in a manner that is fair and
\nworkable.<\/p>\n
Foreign debt falling into the \"reckless\" category will not
\nqualify for restructuring because the provision of loans was done
\nin violation of prudent lending principles, meaning they were
\nproblem loans from the moment credit agreements were signed.
\nTherefore, there is no basis for debt in this category to be
\nrestructured.<\/p>\n
Banks or creditors that engaged in reckless lending to
\nIndonesian firms must bear the risk and write off these loans.
\nThat said, the Indonesian government shall assist banks and
\ncreditors in minimizing their losses. Toward this end, the
\nIndonesian government shall assist in the following ways:<\/p>\n
- Asset repossession: The Indonesian government shall facilitate
\nand provide legal mechanisms for the repossession of assets
\nagreed to as collateral by debtors to foreign banks and
\ncreditors.<\/p>\n
- Investigation: The Indonesian government in close cooperation
\nwith foreign governments shall investigate the wealth of reckless
\nborrowers, whether held in Indonesia or abroad. This wealth shall
\nbe used to reduce the losses of creditors as per the agreements
\nbetween borrowers and lenders. Investigations shall be conducted
\nby professional investigators with international networks. The
\ncreditors or banks in question will bear all costs of these
\ninvestigations.<\/p>\n
- International blacklist: If it is proved that borrowers have
\nwealth abroad and yet are unwilling to surrender these assets to
\nrepay their debts, it shall be agreed to enter the names of the
\nindividuals in question on a blacklist of economic criminals.<\/p>\n
Through this initiative, it is hoped that Indonesia's debt
\noverhang can be settled effectively and fairly. Restructuring
\nshall be made available only for borrowers and creditors that
\nhave acted in good faith and implemented principles of caution
\nand due diligence, meaning prudent lending practices and prudent
\nloan management. Meanwhile, reckless borrowers and lenders who
\nviolated prudential principles must agree to accept the
\nconsequences and risks they took.<\/p>\n
Moreover, by exchanging debt for convertible bonds that are
\nrated according to their risk, a solution is available to settle
\nthe problem of debt overhang in a manner that is effective, fair,
\nand firmly grounded in market mechanisms.<\/p>\n
It must be recognized that the most important factor in the
\nsuccess of this initiative is the high level of independence on
\nthe part of the members of the bodies handling the restructuring
\nof the foreign debt.<\/p>\n
This body must be completely free of intervention on the part
\nof powerful actors who were involved in the collusive, corrupt
\nand nepotistic (CCN) activities that resulted in the foreign debt
\nthat falls into the \"reckless\" category.<\/p>\n
The writer is CEO of Reform Consulting, Jakarta.<\/p>\n
Window: If the IMF and the Indonesian government do not become
\nmore involved in settling the matter of Indonesia's private
\nforeign debt, it will drag on in such a way that all parties
\nwill lose.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/settling-the-foreign-debt-snag-1447893297",
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