Making debtors creditworthy

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.