Making debtors creditworthy

Since fast, firm corporate debt restructuring has been one of the vital requirements for fuelling a strong economic recovery, the government's quick, forceful decision on Monday evening on a more than US$3 billion debt workout for four of the country's biggest debtors should deserve high commendation. The International Monetary Fund, the independent watchdog over Indonesia's economic reform since late 1997 which has often shown impatience over the very slow pace of debt restructuring, should be especially pleased with the quick move by the ministerial Financial Sector Policy Committee (FSPC).

But instead of improving market confidence and gaining stronger political support, the deals could undermine the credibility of the committee, the highest policy-making body for the Indonesian Bank Restructuring Agency (IBRA). As details of the deals remain scanty and the restructuring process opaque, the new economic team could even face allegations of collusion with the debtors, who in the public's perception are among the culprits responsible for the present multi-dimensional crisis besetting the nation.

The FSPC should have realized how sensitive is the corporate debt problem, especially in view of the notorious image of many large conglomerates that thrived under the authoritarian rule of former president Soeharto. We are simply flabbergasted at how inconsiderate the FSPC was of the feelings of the people -- the taxpayers who will bear the cost of bailing out the Tirtamas, Texmaco, Kiani Lestari and Banten Java business groups. Instead of wasting its energy denying that the deals constitute bailouts for the debtors -- they are truly bailouts in the real sense, however one sees them -- the government should have explained fully the economic rationale behind the debt workout.

Bailout is not a bad thing. It is not the issue here. Such a salvation is instead needed to maintain the debtor companies as going-on concerns. The issue is how the bailout is made.

We don't deny the blunt fact that the debtors cannot simply be allowed to go bankrupt because that way the government would not be able to recover even a small percentage of the billions of dollars in taxpayers' money already spent by the conglomerates. It is true that only by keeping the businesses operating will the government or IBRA have any chance of recouping more than a tiny fraction of the money it is owed.

Only by restructuring their debts will the companies gain access to new credit lines to resume full-capacity operations and help to strengthen the economic recovery. Until the Rp 260 trillion ($30.5 billion) in bad debts taken over by IBRA from closed and nationalized banks is restructured or resolved, the nascent economic recovery will remain fragile. Going through bankruptcy proceedings would be quite messy and devastating in respect of the assets to be recovered.

But what we know of the deals as described in the brief press release by the FSPC on Tuesday is very little. IBRA will take over 70 percent ownership and management control of the business groups. One holding company will be set up to operate each of the four conglomerates and each holding company will issue bonds with maturities of between 10 and 12 years to IBRA to cover the conglomerates' debts to the government. Some of the debts were simply rescheduled to a longer period of maturity.

It is a bit of consolation to learn that the deals fully empower IBRA to hire professional managers to run the companies and that each of the businesses will be subject to independent audits based upon international standards. The first option given to the current owners to reassume ownership of the companies once their debts are repaid could also be a great incentive for them to fully cooperate with the new management.

However, the deals will remain suspect until the government fully explains several basic issues. First of all, what are the main results of the due diligence conducted on each of the business groups that led the government to claim only 70 percent ownership. Such independent due diligence is quite vital in view of the common practice among many conglomerates in the past to inflate the capital costs of their investment projects.

The government should also enlighten the public on how viable the debtors' businesses actually are, how competitive their products are, how will they get access to working capital loans to resume full-capacity operations, what will be the role of the current (founding) owners in day-to-day management and what will be the cost of the bonds to the taxpayer.

How the market will accept the debt workout will be crucial to the viability and creditworthiness of the bailed-out businesses. And market confidence in the deals will depend on the detailed explanations that have yet to be provided by IBRA and the transparency and accountability of every step in the daily management of the companies.