New move on debt

The Indonesian government has finally moved to help resolve problems surrounding the repayment of Rp 692 trillion (US$62.8 billion) in corporate debt owed to domestic banks. An impasse on the issue of repayment has resulted in a virtual freeze on lines of credit to businesses in the country. But the immediate question regarding the Jakarta Initiative on corporate debt, which was announced on Wednesday, concerns its ability to force debtors and creditors into serious negotiations. After all, this new move, like the agreement on restructuring Indonesian private foreign debt reached in Frankfurt in June, is not legally binding nor compulsory in nature.

Nevertheless, there are aspects of the new initiative which may encourage debtors and creditors to begin serious talks. While the Frankfurt agreement deals only with the problem of US$80 billion in private foreign debt and focuses almost entirely on debt restructuring, the new initiative addresses domestic debt and, more importantly, includes broader measures to restructure foreign and domestic debt and the businesses of corporate debtors.

Many expected that the new bankruptcy law and the special commercial court which opened last month to adjudicate on bankruptcy proceedings would encourage debtors to negotiate with foreign creditors under the Frankfurt framework and join the Indonesian Debt Restructuring Agency (INDRA). However, no debtors and creditors have so far signed up to the INDRA program, under which debts can be rescheduled over an eight year period and debtors are guaranteed access to foreign currency at a pre- determined rate. It appears that the persistently weak level of the rupiah against foreign currencies and the requirement that debtors signing up to the program must immediately resume loan payments have acted as strong disincentives to companies which otherwise might have made use of the agency's facilities.

On the other hand, a recourse to bankruptcy proceedings through the commercial court, though already taken in a number of cases, is seen as a last resort because it usually leads to a Pyrrhic victory for creditors.

The Jakarta Initiative therefore places an emphasis on amicable, out-of-court, mutually beneficial solutions to the domestic debt problem. The rationale for this is that creditors have a better chance of recovering loans from corporate debtors which remain on-going concerns rather than from liquidated enterprises. The asset value of operating companies is always much higher than that of liquidated ones. Moreover, bankruptcy litigations usually result in the loss of valuable investments already made in long-established relations between a bank and its clients.

Obviously, amicable solutions are possible only when both debtors and creditors negotiate in good faith. This means indebted companies must be sincere regarding their commitment to settling outstanding obligations and that creditors must fully understand the magnitude of difficulties faced by borrowers since the rupiah fell 80 percent in value against the American dollar. Only with sincerely and understanding will both sides reach a workable agreement to restructure both debts and the debtors' businesses.

The new initiative offers a package of supporting measures to debtors and creditors willing to negotiate in good faith. The supporting measures will be implemented by a special task force assisted by a corporate restructuring advisory committee. The measures are designed to facilitate restructuring through the removal of regulatory and administrative hurdles.

The measures oblige debtors to fully disclose their accounts to creditors so that negotiations can proceed in good faith. Technical assistance will be made available to debtors who wish to prepare business restructuring plans and the rules governing the merger of indebted companies have been relaxed.

New rules allowing companies to issue shares in different categories have been drafted, apparently with the objective of facilitating the conversion of debts into equity shares, and tax breaks have been made available to creditors that write off debts.

The objective of the new initiative is obviously to reopen lines of credits to the business sector, without which the economy will never recover. A revitalized business sector will offer increased employment, minimize bad debts, strengthen the banking industry and generate more tax revenues for the state.

The Jakarta Initiative and the package of supporting measures will hopefully provide a more conducive business, legal and regulatory environment for debtors and creditors to seek amicable settlements to the problem of outstanding debts. Simultaneous debt and corporate restructuring offers creditors and debtors with a much better chance of arriving at a mutually beneficial solution. At the end of the day, though, there still remains the option of either debtors or creditors resorting to bankruptcy proceedings through the commercial court.