Debt restructuring vital for healthy economy

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.