Trust: The Medco Group approach to growth

Trust: The Medco Group approach to growth

As professionals, the employees, management and shareholders
of Medco Group are convinced that in business, trust comes above
all else.

In any business relationship, a loss of trust would instantly
ruin a company's image and, slowly but surely, sink it.

And Medco, as a leader among locally owned corporations in
Indonesia, is mindful of this at all times.

In terms of debt, for instance, Medco has consistently paid
off its debts despite the recent economic difficulties brought
about by a protracted economic crisis, during which time the
reputations of many local companies have been sullied by debt
problems.

When the crisis began in 1997, the group's total debt reached
US$709 million (see graph B) and dropped to around $700 million
in 1998 and $500 million the following year. During 2000, Medco
managed to shrink its debt obligation to less than $200 million.
Today, the group has almost fully completed the restructuring of
its debts, with only $50 million in debt this year.

This means that, over the course of three years, Medco has
paid back and structured more than 90 percent of its debt.

The payment of the remaining debt has been rescheduled in
accordance with a bilateral business agreement between the Medco
Group and its creditors.

According to Hilmi Panigoro, the president and CEO of the
Medco Group, the settlement of the debt obligations was not an
effortless process.

"Hard work, plus a lot of money, energy and thought, was
spent in tiring negotiations with creditors with highly varied
interests and desires," he said.

The debt restructuring included a combination of cash
settlements, debt-to-equity swaps and rescheduling. In several
cases, the owners and founder had to sacrifice their assets and
reduce their shares in a bid to meet their strong commitment to
professionalism.

Without this sacrifice on the part of the owners, particularly
the founder, it would have been all but impossible to complete
Medco's debt restructuring.

And with the high level of trust shown by Medco's creditors,
the group was able to achieve a win-sin solution with its local
and foreign partners during the negotiations.

Without adequate corporate debt restructuring, the recovery
that this nation is so dearly in need of will prove to be merely
illusory.

The Medco Group does not want to allow this nation to indulge
in dreams borne of fantasy, but rather wishes to demonstrate its
commitment with concrete measures -- even though the cost of this
commitment is high, and must be paid by the owners and the
founder.

"We here at Medco are blessed as the founder, Arifin Panigoro,
was willing to make sacrifices to save the company," Hilmi
explained.

During the severe economic difficulties, the country and its
business community lost the trust of everyone.

Enjoying significant growth before the crisis, Medco,
naturally, attracted fund managers in the area to offer it short-
term and mid-term financing with a roll-over facility. But when
the financial crisis hit, these fund managers hastily withdrew
their funds and their trust as well.

A mismatch in financing soon followed. The funding facilities
were obtained for the short and mid-term, but the investments
were intended for long-term repayment, and the projects concerned
were still in the development phase.

"Well, the assets had yet to generate any income, but the
funds were withdrawn. In this case, default in debt payment
became inevitable. Like it or not, there was cross-default,"
Hilmi recalled.

The main point is that prior to the 1997-1998 crisis, the
credits obtained by Medco Group, from domestic and offshore
sources, were all healthy. Only when the crisis erupted did they
become bad debts.

In the case of the group's obligation to Bahana, one of the
creditors, the group has paid most of the principal and the
interest in accordance with market mechanisms, namely without a
discount.

The remaining debt to Bahana will be settled, at the latest,
by the end of October 2002, Hilmi said.

Meanwhile, in regard to the group's obligations to the
Indonesian Bank Restructuring Agency (IBRA), a restructuring
proposal has been put forward. In keeping with the target set by
IBRA, an agreement on the settlement of these obligations has
just been reached.

Without the sacrifices of its owners and founder, the group
would not have been able to settle all its obligations to save
and nurture the company and, in doing so, help the nation out of
the crisis.

Such efforts have been hailed by local and overseas investors
and creditors alike.

In its efforts to expand its operational territory to include
some foreign parties in its businesses, while retaining its
identity as a national company, Medco's subsidiary, the publicly
listed PT Medco Energi Internasional, set up a strategic alliance
with Thai state oil company, PTTEP.

"This cooperation combines two powers. Medco is an expert in
onshore oil exploration and production, while our partner, PTTEP,
is a leader in offshore gas production," Hilmi said.

On March 12 of this year, Medco Energi Internasional proudly
received Eurobonds worth US$100 million issued by MEI Euro
Finance Ltd., with Credit Suisse First Boston (CSFB) as the lead
manager.

"This is an honor for an Indonesian national company," Hilmi
proudly said.

According to Sugiharto, the finance director of Medco Energi,
the issuance of the Eurobonds reflects the return of Indonesian
corporations to the global arena.

Kim Hee-Nyeon, the president of PT Aiti Investment, which
arranged for the issuance of $65 million in Eurobonds for the
Medco Group back in 1997, admires the first-class work standards
of the group's management.

"(E)ven though the group delayed the payment due to the
crisis, Medco Group has successfully paid all of the debt two
years after the debt rescheduling," Kim said.

"I strongly believe that the excellent recognition from
offshore investors was one of the main factors in the success of
the recent $100 million Eurobond to Medco Group," he added.

Gustiaman Deru, an executive of CSFB Global Workouts & Special
Situations, shared his experience.

"We were very impressed, especially with the high level of
professionalism and problem-solving ability of the group,
starting from the planning and implementation of the debt
restructuring and followed by the recent acquisition of
substantial control of Medco Energi by PTTEP," he said.

According to him, such an outstanding performance by a local
company will always positively impact on the country and help
improve the image of the country.

"It also represents the continued interest of industry players
and their willingness to invest capital in Indonesian companies
with strong and healthy balance sheets combined with an excellent
management team," Deru added.