Debt settlement scheme to start soon

Debt settlement scheme to start soon

JAKARTA (JP): Bank Indonesia (BI), the central bank, plans to
launch the Indonesian Debt Restructuring Agency (INDRA) on Aug. 3
to help restructure corporate debt and lend support to the
beleaguered rupiah.

BI director Dono Iskandar said INDRA would target 2,000
indebted local companies which together owe US$64 billion to
foreign creditors.

"Some 2,000 companies are eligible to join INDRA, but of
course not all of them will enter the scheme," Dono told
journalists at the central bank's office.

The ultimate aim of INDRA is to reduce pressure on the rupiah
by reducing the dollar demand of private-sector corporations.

"The more companies that join INDRA, the stronger the rupiah
will become. If the rupiah strengthens then most of our economic
problems, like food, electricity and fuel subsidies, will be
automatically solved," he said.

INDRA, set up under the Frankfurt private debt agreement, is a
government institution under the supervision of the central bank.
Dono said Sumitro, an official in the central bank, was likely to
be appointed head of the agency.

Dono said he was optimistic that more and more local
corporations would eventually join INDRA because the agency could
offer certain benefits to debtors and creditors alike.

INDRA will provide exchange rate risk protection and guarantee
the availability of foreign exchange to private debtors that
agree with their creditors to restructure their external debts
over a period of eight years.

"Indra will not assume commercial risk but will operate as an
intermediary between debtors and creditors, receiving rupiah
payments from debtors and making foreign exchange payments to
creditors," Dono said.

Companies eligible for the scheme can register for
participation between Aug. 3, 1998 and June 30, 1999. Those
joining within the first six months of INDRA's operation will be
given the "early bird" incentive of a 0.5 percentage point cut in
interest rates.

The basic interest rate that will be applied to debtors has
been set at 5.5 percent per annum plus the rate of inflation.

There is no restriction on the interest rates which creditors
can charge debtors, but INDRA will provide coverage only for
interest rates up to 3 percentage points above the London Inter-
Bank Offered Rate (LIBOR).

Dono explained that payments would be structured like the
payments on an indexed mortgage and would thus remain constant in
real terms.

However, if a debtor defaults on three consecutive monthly
payments there will be no further obligation for INDRA to deliver
foreign exchange to its creditors.

Dono said the exchange rate at which restructured foreign
loans would be converted into rupiah would be the same for all
debtors, regardless of their date of entry.

It would be the best 20-day moving average of market rates
during the entry period, subject to a floor rate to be announced
on Aug. 3, he explained.

The program also contains a reset window facility which gives
debtors an option to change the rupiah-U.S. dollar rate at which
they locked into the scheme after a period of two years.

For example, if the rupiah strengthened against the dollar
between May and July 2000, the principal amount of outstanding
rupiah loans would be recalculated based on the new exchange
rate, he explained.

"The reset window facility is expected to enhance the
program's appeal because it is widely believed that the current
exchange rate is unrealistically low" Dono said.

The program also offers debtors a number of payment options --
always at the consent of their creditors -- which include cash
payment, accelerated payment, the option to cover an interest
rate higher than LIBOR and an exchange rate "buy-down" option.

Dono said participating in INDRA was an option that should be
considered by debtors and creditors if they could not settle
their debt overhang through bilateral negotiations.

"But if debtors can get a better deal, including a significant
writeoff, through bilateral negotiations, please go ahead," he
said.

Dono acknowledged that many companies have proved reluctant to
sign up to INDRA, but said this might be because they were still
attempting to negotiate bilateral writeoffs with their lenders.

The Frankfurt agreement doesn't cover writeoffs, but both
bankers and Indonesian government officials have admitted that
lenders will have to write off some of the debt.

Dono acknowledged that many Indonesian companies became
technically unable to repay their debt when the rupiah fell
sharply early this year. It is now hovering at around Rp 14,000
to the U.S. dollar.

However, he was still optimistic that Indonesian companies
would join the debt plan, noting that otherwise they would be
declared bankrupt.

"I don't think companies want to be declared bankrupt because
that means they will have nothing left," he said.

The Indonesian government is expected to enforce a new
bankruptcy law by Aug. 20. This law will allow creditors to
demand the yet-to-be-established Indonesian commercial court to
declare defaulting companies bankrupt for liquidation.

In order to market the benefits of the INDRA plan, Dono said
he would invite around 100 Indonesian businesspeople to a
presentation next week.

Roadshows are also planned for some of Indonesia's more
important business cities such as Medan in North Sumatra and
Surabaya in East Java once INDRA is launched on Aug. 3. (rid)