Slow debt resolution

Slow debt resolution

The Indonesian government's decision to hire 20 more foreign
experts on debt restructuring next month shows how frustratingly
slow the process has been to resolve the US$67 billion in
corporate foreign debt and more than Rp 300 trillion (S$37.5
billion) in over-hanging domestic debt. Thus far only $2.5
billion and Rp 1.9 trillion in bad debts have been restructured,
although a resolution of the huge debt problem is one of the keys
to economic recovery.

The progress, achieved about nine months after the
establishment of the government-sponsored Jakarta Initiative Task
Force to facilitate out-of-court settlement of debts, is a real
pittance. One could imagine how much longer it would take to
wholly resolve the huge private sector debt, the key to reopening
the international financial market and domestic credit lines to
Indonesian companies.

Most debtors have simply stopped servicing their debts, citing
the collapse of the rupiah as a force majeure to justify their
laid-back attitude. Realizing that the unilaterally declared debt
moratorium would jeopardize the whole economic stabilization and
recovery program, the government decided in September 1998 to set
up the Jakarta Initiative as a scheme to facilitate debtor-
creditor negotiations. Debtors agreeing on restructuring their
debts under the scheme are given exchange rate protection under
the government-sponsored Indonesian Debt Restructuring Agency.

To prod debtors to negotiate with creditors in good faith, the
government strengthened the bankruptcy law and set up a
commercial court last July to expedite insolvency proceedings.

This more credible insolvency system did prompt more debtors
to negotiate with creditors. The Jakarta Initiative said last
week it was now facilitating negotiations involving $20.8 billion
and Rp 11.6 trillion in debts owed by 181 companies.

More debtors have increasingly realized that unless their bad
debts are resolved their fate will hang in the balance. No
domestic or foreign creditor and supplier will touch them.
Deprived of working capital and shunned by other companies, they
will sooner or later become bankrupt anyway.

However, debt restructuring is a very complex process
involving a lengthy examination of a debtor's strengths and
weaknesses and a design of a sensible business plan and
reasonable balance sheet. Predicting cash flow even for one year
ahead seems rather impossible given the messy business climate
and political uncertainty, let alone for eight years-- the
minimum maturity for debt rescheduling set under the Jakarta
Initiative.

Here, we think, lies the importance of the expertise to be
brought in by the 20 additional international experts who will be
assigned to the Jakarta Initiative Task Force. The fact is debt
restructuring actually is synonymous to corporate restructuring,
which is completely new to Indonesian business culture but is
sorely needed to reinvigorate the crippled business sector and to
enhance good corporate governance.

However, debtors should negotiate in good faith, meaning they
should be fully honest and transparent about their true condition
to creditors. Restructuring, either by debt rescheduling or a
debt-for-equity swap, still gives a fair chance for debtors to
revive their business to robust growth within a few years to come
and for creditors to recoup a good portion of their loans. But a
bankruptcy suit surely leads into business liquidation at the
expense of both parties.

PT Astra International is a paragon of a good debtor. This
group has finalized agreements with almost all its foreign
creditors, including Japanese bankers well-known as the toughest
among them, who praised the honesty and transparency with which
the management presented business plans for debt rescheduling.
Debtors also should not hesitate to cede majority ownership of
their companies in case debt-for-equity swap is the best method
for resolving their debts. Bakrie Brothers is a case in point.
This group prefers losing controlling ownership to foreign
creditors but still maintains a good reputation and trust of
international and domestic businesses.

On the other hand, though, foreign creditors are required
to show a good understanding about the woes faced by their
clients. They should not indiscriminately insist on recovering
fully all credits and interests due but be reasonable in the
valuation of their debtors' assets. Forcing debtors to surrender
assets at fire-sale prices could cause a nationalistic backlash.
Both debtors and creditors who in the past shared the benefits of
their deals should be willing now to share losses.