New move on debt
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.