IBRA restructuring rules aim for transparency

JAKARTA (JP): The Indonesian Bank Restructuring Agency (IBRA) expects to make its debt-restructuring deals fully transparent with the issuance of restructuring principles in response to criticisms that the agency has been offering "sweetheart" deals to large debtors.

According to the principles, a copy of which was obtained by The Jakarta Post, a transparent debt-restructuring process would maximize the recovery rate for the government.

"They (the principles) are designed to promote economically viable restructurings, which are the key to sustained economic recovery and a reduction in unemployment," the document said.

The debt-restructuring principles were adopted early this year, but IBRA had never made them public.

The government attached a copy of the principles to the draft of the upcoming letter of intent (LoI) that was worked out with the International Monetary Funds (IMF) last week.

The government established IBRA in 1998 to take charge of the restructuring of non-performing loans taken over from local banks. Since then, the agency has amassed bad debts and taken over assets worth some Rp 600 trillion.

IBRA restructures loans by, among other things, selling the collateral or rescheduling debt repayments. The proceeds are then transferred to the government as revenues for the state budget.

But IBRA has been criticized for allegedly offering certain debtors sweetheart restructuring deals at the expense of getting maximum recovery rate.

"To this end, the principles recognize that the borrowers must repay to the maximum extent of their ability and they should personally guarantee their company's debts," the principles state.

But despite the instruction, in some cases it remains unclear whether large debtors have indeed pledged their personal guarantees.

For instance, the Sinar Mas Group owed its affiliate Bank Internasional Indonesia (BII) debts worth US$1.2 billion, which were later taken over by IBRA.

But the guarantee agreement between IBRA and Sinar Mas does not mention the name of Sinar Mas' founding owner, Eka Tjipta Widjaya, among the list of those having to surrender their personal assets.

As yet, IBRA cannot confirm whether Eka has pledged his own assets as collateral to the agency.

Analysts have also warned that former owners might regain control of companies they had once surrendered as collateral to IBRA.

Such moves would allow owners to "park" their financially ailing firms or banks at IBRA, and buy them back once they had been nursed back to health.

It is feared that the restructured firms under their former owners could suffer from the same mismanagement that led them in the first place to the IBRA "restructuring hospital".

The principles stipulate that all necessary steps are taken "... to ensure that enterprises, which remain debtors to the state, are operated in a safe and sound manner in the public interest and cannot be misused by former owners to promote their own interests."

"For this reason, the majority of the equity in large restructured enterprises will normally be provided to creditors, including IBRA."

As to the debt restructuring process itself, the principles require an independent assessment of the future viability of indebted enterprises.

The assessment will explore all recovery options, including the sale of loss-making and/or non-core units, and the winding up of non-viable companies, the principles said.

"Sustainable debts will be rescheduled on market terms, non- productive assets sold, and the remaining debt converted into quasi-equity (normally long-term convertible bonds), and equity."

IBRA, as a shareholder in an indebted company, would "in every case initially assume a majority position."

But the principles add that this majority position would only be of a temporary nature so as to ensure the recovery of remaining debts to the government.

The document further said that through its position as creditor and quasi-equity holder, IBRA will assure its entitlement to, among other things, control cash flows, accelerate debt repayments from excess cash, and set company and management performance targets.(bkm)