Restructuring: a how-to guide: successful debt restructurings in emerging markets require careful planning by foreign creditors

International Economy, The, Nov-Dec, 2001 by Steven T. Kargman

In light of all of these formidable obstacles facing foreign creditors when working on restructurings in the emerging markets, foreign creditors would be well advised to focus on developing comprehensive and cohesive strategies for managing the restructuring process. The aim of these strategies would be to accelerate the process for reaching restructuring solutions as well as to enhance the leverage of foreign creditors in the negotiation process itself, or at a minimum to neutralize some of the advantages of the debtor in this process.

The creditors should ultimately adopt a multi-faceted strategy for effectively managing and advancing the restructuring process. The following are three possible components of such a broader strategy framework:

Developing a Workable Creditor Steering Committee Structure. In most restructurings, at the outset of the process, the creditors generally form a steering committee to coordinate creditor interests and handle negotiations with the debtor. But some steering committees operate more effectively than others do, and therefore it is critical that this first step by the creditors in organizing and forming a steering committee be given the consideration and attention it deserves.

In designing a steering committee, creditors generally seek to have creditors with the largest exposures represented. They also seek to have the steering committee be representative of what may possibly be a diverse universe of creditor interests. Thus, while each steering committee will be slightly different in its particular composition, a steering committee might consist of, among others, one or more of the following types of creditor institutions: commercial banks (both local and foreign), bondholders, sovereign export credit agencies, international financial institutions, and host government financial institutions and agencies. In each instance, whether a particular creditor constituency will be represented on a given steering committee may depend on various factors that are taken into account by the creditors organizing the committee. Such factors may include, for example, whether a particular creditor constituency or individual creditor holds a significant portion of the outstanding debt; whether a particular class of creditors made their loans at the holding company or operating company level; or whether certain creditors have purchased their debt at deep discounts and thus may have a different perspective and different recovery expectations than original lenders to the company.

A steering committee may consist not just of foreign creditors, but also possibly of the important domestic creditors as well. To the extent possible, foreign creditors should try to develop good working relations with the important domestic creditors, even if at times these two groups of creditors may have divergent perspectives and interests. Depending on the specific circumstances of a given restructuring, domestic creditors can be important allies for the foreign creditors in the restructuring process. In some restructuring situations, it is virtually inevitable that foreign creditors will have to work with large and important domestic creditors. In Indonesia, for example, the Indonesian Bank Restructuring Agency (IBRA), a government agency, has been a participant in a number of large Indonesian corporate restructurings.