Debt restructuring supports troubled companies

Debt restructuring supports troubled companies

By Candelario Tambis

JAKARTA (JP): From mid-1997 up to today, many companies have
been in financial trouble because of the lingering economic
crisis. Financial difficulties of distressed companies are caused
by a variety of reasons, however, in a time of crisis these
companies share one common survival alternative -- debt
restructuring.

In the language of the ordinary people on the street, debt
restructuring is a process of finding possible solutions to the
question of how an existing debt may be restructured and replaced
by a new debt arrangement with creditor's approval.

The definition may be simplified through an illustration
whereby a certain debt is restructured by means of rescheduling
amortization payments (extending the payment periods from two
years to six years), and by revising the terms (for example,
changing the interest rate downwards, from 30 percent to 24
percent per year).

Debt restructuring is not always restricted to this simplistic
example. In the language of corporate finance, there are other
more sophisticated options available "to reduce, to delay, and/or
to eliminate contractual obligations". The main thrust of the
process is to pick the appropriate debt structure that affords
the distressed company the most realistic opportunity to meet its
obligations. Once the restructured debt arrangement is agreed
upon, the debt-ridden company must select the appropriate
financial structure which most closely supports the strategic
direction of the business, otherwise, it would not be easy for
the debt restructuring plan to succeed.

Debt restructuring is not an easy task. Due to the huge amount
of Indonesian corporate debts, a facilitator is deemed necessary
to assist in the restructuring process. In this capacity, the
movement launched by The Jakarta Initiative is highly laudable
and merits the support of creditors and debtors alike. The
initiative aims to promote prompt and accurate debt-handling, by
requiring debtors to register with and report to the organization
for a debt restructuring process. As debt restructuring builds
momentum, it is expected that The Jakarta Initiative will also
serve as the national watchdog for "enforcement responsibilities
aimed at establishing a national system of debt restructuring
together with a system for the nationwide clearance and
settlement of corporate debts".

From the perspective of the debtors, companies are perceived
as national assets which play an important role in the country's
economic wheel of progress. Liquidation attempts should be de-
emphasized during the debt restructuring process, unless the
company concerned is really worth more "dead" than "alive".

In this context, debtor-companies need some kind of
resuscitative privilege while the restructuring process is on-
going so they can concentrate on negotiating their case with
their creditors.

The price for this privilege is the willingness of debtors to
participate and cooperate in the process by disclosing all
relevant data and information about their operations and the
future financial prospects of their businesses. They must bare
their financial soul to permit informed analysis by creditors.

To exercise sound judgment while under strong pressure of
possible bankruptcy is nerve-racking, and given an uncertain
environment, it would be good judgment if the financially
troubled companies would immediately join the debt restructuring
program. Any further delay would be ruinous in a continuing weak
and deteriorating financial situation.

From the perspective of the creditors (who are mostly
commercial banks), they are perceived as partners in development,
and advance together with their clients. This partnership
encompasses a number of prerequisite requirements of strict
return-criteria through qualitative and quantitative analysis.
Needless to say, creditors are presumably cognizant of the
problems currently faced by their debtor-clients.

Hence, creditors are expected to refrain from making
overwhelming demands that would only exacerbate the already
problematic situation. Like their debtors, creditor-banks should
exhaust all possible avenues to solve the debt problem on a win-
win basis; failure to do so would be mutually unprofitable for
both creditor and debtor.

In anticipation of major disagreements occurring during the
debt restructuring process, the presence of The Jakarta
Initiative as a government facilitator is of paramount
importance. Disagreements can range from the use of different
discount rates to predicting cash flows related to amortization
and interest payments. Questions may arise in relation to what
concession to give to borrowers, and questions on what incentives
exist that borrowers are prepared to give to creditors.

Debt restructuring is a serious exercise and it should be
addressed with the vigor of a standard business review
investigation. It should disallow constituent parties to
dillydally with the issues. Should a negative attitude be
displayed by a participating debtor-company, the facilitator must
move to put into immediate effect the government policy on debt
restructuring -- that is, foreclosure and bankruptcy proceedings.

Debt restructuring initiatives have been on-going for almost
one year, and yet significant results, particularly in the real
sector, are yet to be realized. Of course, some degree of success
in the banking sector has been partly realized because of
external as well as internal pressures. What people really need
is an overall debt restructuring plan to include small to medium
size companies, for which the impact on society is greatest.

Debt restructuring is a survival tool for financially troubled
companies. As previously mentioned above, if the company is worth
more "dead" than "alive, then it must be liquidated without
further ado.

However, if the company's valuation is affirmative, then it
must be given a chance to recuperate by participating in the
program initiated by The Jakarta Initiative.

An effective debt restructuring process should include but not
limit itself to the following elements: 1) the presence of a
proactive facilitator; 2) willingness of debtors and creditors to
participate and cooperate wholeheartedly; 3) a comprehensive
business review investigation of distressed companies that need
restructuring; 4) public disclosure of results of the business
review investigation, if the distressed company involved is
publicly listed; and 5) inclusion of an independent director
(non-executive) in a distressed company's board of directors who
will be required to act as chairman of the distressed company's
audit committee.

The writer is an investment adviser based in Jakarta.