Debt restructuring vital for healthy economy

By Cliff Sanderson

JAKARTA (JP): The international banking community has been very critical of Indonesia's new bankruptcy court. The court has been criticized for handing down decisions that demonstrate a lack of understanding of banking and commercial practice and the Bankruptcy Law.

The cynicism of creditors can be seen by the low number of bankruptcy applications to the court. In the eight months to the end of April 1999, there have been 58 applications only. When the court was established, it was estimated they would have to receive up to 30 applications a day. In Australia, by contrast, there are more than 200 a month.

Meanwhile, there is now a growing number of restructurings outside the court. In the past 10 months, Ernst & Young has been appointed to carry out 22 major restructuring assignments, 14 of which involve companies listed on the Jakarta Stock Exchange.

It is a positive sign that these restructurings are underway. With restructurings, deals can be designed to match the circumstances of both the debtor and creditor.

The process of restructuring debts is new to nearly all Indonesian debtors. My experience suggests that companies often make the same mistakes.

At present, banks are willing to look at proposals put forward by debtors to restructure. Banks do understand that companies are in financial difficulties and debt restructuring deals need to be done.

There is a standard process applied to restructuring debts. If a company chooses to try and shortcut the process, then it runs the risk that it will actually take longer, because creditors are never fully comfortable with what is happening.

It will always be necessary to fully disclose the financial position of the company to the creditors. The process will usually also involve a report prepared by an independent investigating accountant. Even when there is bad news, it is better to deliver it early in the process.

The risk of not disclosing fully is that creditors:

* will find out late in the process causing long delays in finalization;

* won't be able to understand what is driving the company;

* will not feel comfortable in agreeing to a proposal if they do not adequately understand the company's financial position.

In the meantime, having customers who cannot repay their debts is new to many banks as well. Sometimes a company simply cannot repay its debts in full. In that case, the banks will have to accept that they will not be able to get all of their principal and interest repaid.

Although debt restructurings are certainly favored by international banks and their Indonesian corporate clients, it does not mean that the new Bankruptcy Law are not needed. There were old Bankruptcy Law but they are almost never used due to a variety of deficiencies.

It is an unfortunate fact that effective Bankruptcy Law are an essential element of a healthy economy. When things go bad, then lenders, investors and creditors must have a last resort option to recover their money.

The writer is a corporate recovery specialist and Technical Advisor of PT Ernst & Young Consulting in Jakarta.