Will 'Jakarta Initiative' succeed in its daunting purpose?<\/p>\n
By Eddy Soeparno<\/p>\n
JAKARTA (JP): The Indonesian government recently announced The
\nJakarta Initiative, by forming a Task Force to coordinate the
\nrestructuring process of Indonesia's mounting private sector
\ndebt, estimated to be around US$65 billion.<\/p>\n
The principles laid out for the restructuring exercise (which
\nto date are believed to be non binding), will be used as a
\nguideline for all corporate workouts involving foreign creditors.<\/p>\n
Key points of the framework include: the appointment of a
\ncredible financial advisor by each troubled debtor; debt
\nrestructuring will require business reorganization -- not just
\nnew loan repayment terms; a promise by debtors to provide
\naccurate and timely financial information; a pledge by creditors
\nthat if such information is forthcoming they will agree to a
\n"standstill" and not charge default interest and other penalties;
\nand that creditors will be treated equally with equity holders
\nsuffering the first losses.<\/p>\n
To add credibility to the whole initiative, the task force
\nwill work closely with a so called Corporate Restructuring
\nAdvisory Committee, consisting of high caliber foreign and
\ndomestic financial institutions, the Indonesian Bank
\nRestructuring Agency (IBRA) and the Indonesian Debt Restructuring
\nAgency (INDRA). The Committee, will further function as a de
\nfacto "think tank" for the Task Force, by providing necessary
\nrecommendations on various debt and corporate workout problems.<\/p>\n
Although the plan does not by itself initiate any debt
\nrestructuring talks, it is expected to further set out a standard
\nof practice and can be referred to as a starting point for more
\nprogressive and positive negotiations.<\/p>\n
However, the question remains: Why only now?<\/p>\n
It is no secret that the government was widely criticized for
\nnot addressing the private sector debt issue swiftly and more
\nimportantly, accurately; since debt restructuring talks had
\nalready begun as early as November 1997 and remain unresolved to
\ndate.<\/p>\n
In addition, discussions between international creditors and
\nthe government led Private Sector Debt Restructuring Team have
\nproven to be less effective in overcoming the problem. And
\nfinally the much anticipated flop of INDRA, should have given the
\nauthorities a clear indication, if not proven, that government
\nled efforts needed a more cohesive and consistent approach, in
\norder to achieve any meaningful results.<\/p>\n
The result is evident today: Indonesia's foreign exchange
\nobligations are still at record high levels; industries have
\nhalted, as much of the needed offshore liquidity is kept tightly
\nin creditor's pockets, while the health of the banking sector is
\ndeteriorating by the day due to the rising amount of bad loans.<\/p>\n
Does it actually require a contracting economy to prove that a
\nmore concentrated effort is required to address the private
\nsector debt issue? Recent developments show that creditors are
\nimpatient about the lack of negotiation progress and stepped up
\npressure by opening the window of liquidation, especially since
\nthe national bankruptcy court opened its doors for business last
\nAugust.<\/p>\n
This development seemed to have caught the attention of the
\nauthorities, since more bankruptcies effectively result in higher
\nunemployment, lower tax revenues (for the Government) as well as
\npotential bankruptcies of supporting industries.<\/p>\n
As such, in order for the Jakarta Initiative to serve its
\nprimary purpose, the government, through the recently established
\nTask Force should first and foremost identify the immediate
\nproblems lenders and borrowers face in their debt talks.<\/p>\n
It should come as no surprise that in most creditor's view,
\nthe principles laid out in the Jakarta Initiative consist of
\n"yesterday's news", as these efforts have been actively applied
\nin negotiations over the past 10 months with minimal results.<\/p>\n
Therefore, it is in the Task Force's best interest to analyze
\nhow workouts are actually being "worked out" rather than
\nimplementing other "half cooked" efforts which have proven
\nineffective in the past.<\/p>\n
For instance, creditors are nowadays not shy in accepting
\n"haircut" settlements, in which a debtor makes good its
\nobligations to his creditor at a (normally steep) discount.<\/p>\n
In a way, haircut settlements are preferred by certain
\nparties, as time, energy and other resources can quickly be
\nallocated to handle other, more productive businesses.<\/p>\n
In addition, many creditors have primarily charged off a bulk
\nof the problem assets from their books; thus any haircut
\nsettlement would be rightfully booked as another form of income.<\/p>\n
Other settlement practices such as debt to equity swap, are
\nalso becoming increasingly popular, although some creditors still
\nfirmly believe that "banks are in the business of managing risk
\nand not assets".<\/p>\n
Furthermore, it is equally important to ensure that debtors
\nare aware of the principles and ethics of debt restructuring, as
\nmany debtors (mostly out of inexperience), have acted in a manner
\nthat is totally unacceptable to creditors.<\/p>\n
Often company owners and directors have refused or stalled a
\nrestructuring process in anticipation of an immediate rebound in
\nthe rupiah.<\/p>\n
Others have agreed to restructure, but have prevented
\nauditors, lawyers and valuers from conducting proper and
\nnecessary investigations.<\/p>\n
In addition, more than a handful of debtors have acted as if
\nit were "business as usual" with the company, by continuing to
\nsidestream funds, shifting assets from one subsidiary to the
\nother, without realizing that the minute a debtor is declared in
\ndefault, creditors maintain the right to have a say on how
\nbusiness should be run.<\/p>\n
Finally, ingredients to a successful debt restructuring would
\ninclude honest and open information flow between the two parties.<\/p>\n
As such, the issue of disclosure, previously a "taboo" subject
\nto most business families should be revisited and reemphasized.<\/p>\n
The Task Force should realize that in most cases it is lack of
\ndisclosure that slows down discussions between banks and
\nsometimes even jeopardizes progress made in earlier talks.<\/p>\n
If the Task Force can manage to precisely identify the above
\nissues and address them accordingly and wisely, only then can the
\nJakarta Initiative produce quick and meaningful results.<\/p>\n
Most bankers and economists say an economic recovery in
\nIndonesia cannot be engineered unless the mounting foreign debt
\nproblem is dealt with.<\/p>\n
Unfortunately clear evidence has shown that past efforts at
\ndebt restructuring have floundered as creditors mostly squabbled
\nwith borrowers over how to conduct negotiations.<\/p>\n
While continuing to sit on negotiating tables, creditors have
\nrecently shown impatience with the lack of progress and started
\nshowing signs of leaving the matter to the (bankruptcy) courts.<\/p>\n
Progress on corporate debt restructuring will be a key focus
\nover the months to come and the Task Force will be in the
\npublic's scrutiny, as this is seen as a final attempt by the
\ngovernment to facilitate the negotiations, before directly
\nintervening in the workouts.<\/p>\n
It is highly probable that the Indonesian government, out of
\ndesperation and impatience, will call for direct intervention, if
\nthe guidelines announced in the Jakarta Initiative do not foster
\nquick solutions.<\/p>\n
The IMF seems likely to support such actions, as in the case
\nof Thailand. The Kingdom's most recent letter of intent with the
\nInternational Monetary Fund says that, if necessary, the
\ngovernment will develop procedures "for enforcing a timetable for
\nimplementing agreed guidelines, including arbitration among
\ndeadlocked parties".<\/p>\n
In most cases you could say that "extreme problems call for
\nextreme solutions". Looking at the state of the nation's economy
\ntoday, it is time for extreme solutions.<\/p>\n
The writer is a corporate finance director of American Express
\nBank.<\/p>\n
Window: It should come as no surprise that in most creditor's
\nview, the principles laid out in the Jakarta Initiative consist of
\n"yesterday's news", as these efforts have been actively applied
\nin negotiations over the past 10 months with minimal results.<\/p>",
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