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

Although it is important to have a representative steering committee consisting of major creditors to the debtor, if the steering committee is too large, it may complicate the task of the creditors considerably. In the first place, formation of a large steering committee may make it difficult to reach consensus within the committee on both procedural and substantive matters. Moreover, it may also prevent decisions from being reached quickly so that the steering committee can respond to the debtor on a broad range of issues in a timely manner. Finally, and perhaps most importantly, it may convey to the debtor an impression that the creditors are disorganized and even in some disarray, which may then hinder the effort of the creditors to present a united front to the debtor in any negotiations.

While it may not please those institutions that are excluded, a steering committee may be much more effective in the long run if the creditors can find a way to narrow the membership on the committee to a compact group, perhaps ten institutions or fewer. If this proves to be impossible, the steering committee members might as an alternative designate a smaller group of creditors to serve as an executive committee that will then assume the leadership role and chief negotiating responsibilities for the steering committee as a whole.

As a practical matter, forming a steering committee may be seen by many creditors as a mere housekeeping issue. Yet unless the formation of the steering committee is handled properly at the outset of the restructuring process, it can potentially have long-term negative consequences on the ability of the creditors to reach a timely restructuring solution. In fact, the creation of an unwieldy steering committee structure may give the debtor an excuse not to cooperate in moving the process forward in a serious way. The debtor may complain, with or without some justification, that it is impractical to make confidential and sensitive business and financial presentations to a steering committee whose full membership can only be accommodated, for example, in an extremely large meeting room. Similarly, the debtor may also complain that it is difficult to engage in substantive, detailed and frank discussions and negotiations with such a large group of creditors.

Conversely, if done correctly, the formation of a manageable and lean steering committee structure can contribute to much more efficient internal consultations and sharing of information among the creditor group. Furthermore, it can also lead to much more focused and disciplined discussions and negotiations with the debtor.

Establishing Realistic but Ambitious Timelines and Milestones. As noted above, if the debtor is left to control the process, restructurings in the emerging markets can potentially extend over many years. The debtor may have declared or instituted a debt service moratorium during this period, in which case the creditors by and large may not be receiving any debt service payments. (If during such a debt standstill the debtor has decided to make debt service payments to selected creditors, this may raise questions about the fairness and even the long-term viability of the standstill.) The creditors therefore need to be pro-active in trying to manage the timing and pacing of the process, since, depending on the circumstances, time is generally on the debtor's side. Specifically, creditors should clearly set forth their expectations for when they expect to see certain key milestones completed.