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.