SECTION H - WORK OUTS

The concept of the informal ‘work out’ might be said to be based on a combination of the following elements:

  • the fact that there is a significant size of debt owed to a number of different creditors (mostly these would be bank or other financial institution creditors) and the present inability of the corporate debtor to service that debt;
  • the attitude that it may be preferable to negotiate an arrangement for the financial difficulties of the debtor both between the debtor itself and the financiers (and perhaps other lesser creditors) and also between the financiers themselves;
  • the availability of relatively sophisticated refinancing, security and other commercial techniques that might be employed to alter, re-arrange or re-structure the debts of the corporate debtor or the corporate debtor itself;
  • the sanction that if the negotiation process cannot be started or breaks down there can be relatively swift and effective resort to the application of an insolvency law; and
  • the prospect that there may be a greater benefit for all through the negotiation process than by direct and immediate resort to the insolvency law.

In relation to these elements:

(a) identify which of these elements are appropriate and relevant to this economy;

The elements which are appropriate and relevant to Indonesia are fact, availability and prospect. Since the sanctions have not been demonstrated to be clearly effective, there is an adverse effect on attitude.

 

(b) which of these elements might be considered absent, ineffectual or of little consequence in this economy?

The elements which might be considered absent, ineffectual, or of little consequence in Indonesia are sanction and attitude.

 

(c) which of these elements would be viewed as the least persuasive if a work out was contemplated?

The element which would be viewed as the least persuasive if a work out were contemplated is sanction.

 

(d) are there any other elements that are relevant to this issue in this economy?

Several elements are relevant to this issue in Indonesia, i.e.:

1. A critical element is the collapse of the Rupiah against the US Dollar. The devaluation of the Rupiah has been more than 300 percent at its best. This means that debtors have been unable to conclude a work-out in many cases, even if they are otherwise willing to do so, because there are insufficient rupiah earnings to generate the necessary US$ to service debt;

2. The collapse of Indonesia's banking sector also makes re-negotiation of debt more difficult. A new Government-appointed management has been placed in control of many Indonesian banks. This makes negotiations more difficult because the lender's management now has different interests in dealing with debtors.

3. Governmental assistance in the negotiation process may be required under the above circumstances. Governmental participation as a mediator or facilitator to help in the negotiation process is needed and has now been established:

a. the Indonesian Debt Restructuring Agency ("INDRA"), voluntary program which creates a framework for the restructuring of the external debt of the Indonesian private sector and provides debtors with foreign exchange rate protection;

b. the Indonesian Bank Restructuring Agency ("IBRA"), a government agency established under Presidential Decree No. 27 of 1998 regarding the Establishment of the Indonesian Bank Restructuring Agency (January 26, 1998), whose main duty is to conduct banking restructuring in Indonesia under Presidential Decree No. 34 of 1998 regarding the Duties and Authorities of the Indonesian Bank Restructuring Agency (March 5, 1998);

c. the Exchange Offer Program, providing a scheme in which obligations owned by the Indonesian domestic banks to foreign banks may be exchanged for new loans with terms of up to four years;

d. Trade Finance, an arrangement to maintain trade facilities to enable the continuance of import and export flows for Indonesia;

e. The Jakarta Initiative, out-of-court commercial negotiations between a creditor and debtor, on an expedited basis, for corporate and debt restructuring.