Cross-Border Debt Restructuring by Indonesian Companies: A Primer on Key Considerations by an International Deal Lawyer

Pooja Sinha[1]

 

 

An Indonesian debtor looking to undertake cross-border debt restructuring would find itself faced with a very confusing mix of developments in the cross-border debt restructuring landscape. Indeed, there is a bewildering assortment of media reports on the complexities around many high-profile debt restructuring deals, reports in the legal press on landmark judgments being delivered by courts in different jurisdictions on debt restructuring deals and/or news of national governments across the globe passing bespoke laws on debt restructuring and insolvency practically overnight in order to address some of the unique features of the current economic crisis.

 

From the recent experience of helping an Indonesian company in successfully navigating these challenges in order to close a restructuring of their international bonds, it appears to be necessary to distill recent developments in the international debt restructuring deal landscape into practical takeaways for Indonesian companies - namely certain key considerations that Indonesian companies should generally factor into developing an effective and efficient strategy for a cross-border restructuring. While each debt restructuring (and indeed strategy for a successful debt restructuring is very deal specific), these key considerations are intended to provide an overall framework to understand, anticipate and potentially pre-empt some of the key universal challenges that are heightened in the post-COVID world whether the international debt issued is simple or complex (e.g. with various companies, offshore holdings, multiple creditor types, US and IDR that required conversion of most debt to equity) and whether the relevant debt restructuring forum is in the US, Singapore, Indonesia or indeed elsewhere.

 

Additional challenges for debtors that have issued international bonds: In addition to dealing with the “ordinary course” matters that arise during debt restructurings, debtors that are also issuers of international bonds also have to cope with certain additional challenges thrown at them as a result of the following:   the unique structure of bond documentation governed by English or New York law; the functional peculiarities of international clearing systems; market practice relating to bonds within a global context.   Certain additional points for international bonds have therefore also been set out in case they prove useful.

 

 

1. Engage early with creditors and other stakeholders: Lawyers & Financial Advisers are an important piece of the puzzle

 

During this period of extreme disruption brought about by COVID-19, it has become doubly important for debtors to engage with creditors early because crafting a debt restructuring proposal WILL take additional time. At the best of times, crafting this proposal is a complex task given, among other things, the need to formulate a way forward that is both commercially viable for a debtor in its business and industry context and acceptable to a diverse mix of stakeholders from shareholders, other creditors and “white knight” lenders to any domestic or international regulators and courts that are involved, to name a few.  A debtor also needs to address upfront certain key inter se creditor issues: where each creditor stands in the capital structure, the rights of each class of creditor before and after the restructuring and the impact of amendments in one set of creditor documentation on another set of creditor documentation. 

 

The challenges are obviously heightened during the COVID-19 pandemic. A quick survey of some of the headline features of recent restructurings from around the world (See the case of the Republic of Argentina available here and Suzlon available here), give us an overview of the complex elements that appear to have become a standing feature of almost any restructuring proposal: debt-equity swaps, a commitment to reduced capex, capital infusion from shareholders and/or a debt exchange with the new debt having a longer maturity or more favorable interest terms. It is highly advisable to engage with financial advisers and lawyers early on to allow sufficient time for this crafting process. 

 

Once a proposal is circulated, then proverbially speaking, the “bullet is out of the gun”. Any changes to a debt-restructuring proposal (whether to amend the terms of the proposal to address creditor feedback or indeed changes in market conditions) will require a fresh creditor consent process (although there may be some flexibility not to launch a full-scale fresh consent process if the modification provisions of the original consent and/or if applicable law governing the consent so permit). Depending on the circumstances, a fresh regulatory/court approval process may also be required which can significantly affect the deal closure momentum. Frequent changes to the commercial terms of the debt restructuring proposal can also be confusing to international creditors who often require fresh internal approval for significant changes to deal terms.

 

Add Practice points for international bonds: Bond documents are set up with long notice periods for voting As an example, English law bond documentation typically requires the giving of notice for a fairly long period of 14 to 21 days to bondholders for any voting event such as a restructuring proposal that requires an amendment to the terms. For US-directed restructurings that attract the US tender offer rules, there are special notice requirements that apply under US securities laws. In addition, setting up a consent process in DTC (particularly a non-traditional consent where DTC bonds are exchanged for non-DTC bonds) will typically require the tender/consent agent to interface with DTC for an extended period to iron out practical aspects of how the consent will be structured.      In some cases, a shorter notice is possible with physical bondholder meetings but these are obviously impracticable to schedule in the current landscape of lockdowns and travel restrictions. In some recent instances, bond trustees have been amenable to allowing Zoom meetings to replace physical meetings but this depends on whether the specific terms of the bonds in question allow the kind of flexible interpretation required to accommodate this unanticipated scenario.   It is generally more challenging to identify bondholders Because of the relative anonymity offered by international clearing systems, it can be particularly challenging to identify bondholders. What some bond issuers don't realize is that there are tools available to engage with bondholders early so as to have a fairly fleshed out and advanced restructuring proposal formulated at an early stage of a deal. Certain specialist intermediaries can conduct “bondholder IDs” that can help identify at least some of the actual decision-makers in respect of holdings of bonds. In addition, it is also possible to put out public notices through newspapers or other public means inviting bondholders to reach out to the bond issuer with the debtor’s legal counsel and/or financial adviser serving as the primary point of contact.

 

 

2. Don’t underestimate the importance of disclosure

 

Disclosure on the debtor is often not prioritized while crafting documentation that includes the actual debt-restructuring proposal that is presented to noteholders, particularly for debt restructurings not directed at US holders.

 

Practice point for international bonds: For debt restructurings that are directed at US holders, the involvement of US counsel results in disclosure of a generally higher standard because of certain prescriptive disclosure standards that apply under US securities laws (and also the generally higher risk of enforcement action for disclosure failures by the SEC as compared to other national securities regulators).

 

In this challenging post-COVID economic landscape, disclosure has an enhanced role and from a debtor perspective, it should be looked at as a friend and not a foe. There is a certain standard time-tested framework in the “new money” capital markets that can be readily deployed by a debtor to determine the kind of information that would, generally speaking, be “material” (and indeed “expected”) by existing investors who have to decide on whether to agree to a debt restructuring proposal. Effectively, it allows the debtor to “control the (public) narrative” regarding its debt restructuring proposal and pre-empt questions that are likely to be at the forefront of a creditor’s mind anyway.  One example of such a framework is the very useful guidance put out by the SEC on disclosure-specific points arising from the COVID-19 crisis – available here and here. 

 

3. Be alive to the potential for leveraging a court process for moratoriums and cram-downs

 

One of the classic issues in a debt restructuring is how to deal with “hold outs”- i.e. the small handful of creditors who object to the debt-restructuring proposal and who can effectively hold the entire deal to ransom. Given the enhanced economic pressures brought about by the current economic crisis across creditor groups, it is reasonable to expect that there may be increased pushback on any debt-restructuring proposal (particularly those that require creditors to take haircuts) or at least, divided opinion among the creditor group on the acceptability of the debt-restructuring proposal.

 

Practice point for international bonds: English law bond documentation typically already contains a cram-down mechanism in the form of a “collective action clause”. This clause effectively allows a qualified majority of bondholders to agree to a legally binding debt restructuring. This restructuring is then applied to all holders of the bond – even those who voted against it. However, these thresholds are typically quite high (75% or 90% depending on the subject of the vote) and not easy to reach. This is a particularly vexing issue for bonds issued under New York law indentures governed by the Trust Indenture Act, as they require 100% bondholder consent for certain material amendments.

 

What debtors don’t realize is that they may be able to use court processes that are outside the strict four corners of their financing documentation. As a result of competition between different jurisdictions positioning themselves as hubs for debt restructuring, several countries now have legislation on their books enabling their domestic courts to exercise jurisdiction on cross-border debt restructurings based on fairly expansive criteria.

 

One recent example was the Singapore court’s admission of the debt-restructuring proceedings in respect of Indonesian company, MNC INVESTAMA, in which the listing of the bonds on the Singapore stock exchange was considered sufficient to constitute jurisdictional nexus. There was also precedent in the US for cash paid to lawyers in the US constituting sufficient nexus for the exercise of jurisdiction by the US court (which was quoted by the Singapore Court in the MNC judgment). The English courts have also typically taken an expansive view on exercising their jurisdiction over English law debt issued by foreign companies to be subject to a scheme of arrangement.

 

Once a debtor has successfully established jurisdiction with a particular court (and there are certain nuances to this which will need to be carefully examined depending on the court and/or debt restructuring regime in question), a debtor may be able to:

• use the “class cram-down” provisions available within the domestic court process to effectively benefit from a lower voting threshold than what is available under its debt documentation; and
• obtain a moratorium against creditor actions for a certain period to buy itself some “breathing room” (although in several jurisdictions, the grant of the moratorium is not automatic and the court has the discretion to decide whether to grant the moratorium and the length of the moratorium).

 

4. Do your internal legal “house-keeping” before engaging in a debt restructuring

 

Indonesian debtors often start off wanting to complete a consensual (and peaceful!) consent process and do not realize that their plans can be derailed by aggressive creditor actions in various forms.

 

The overall unexpected shrinking of the economic pie has put unexpected pressure on several lenders causing them to take more aggressive action against defaulting borrowers than they otherwise would. Potential examples could include being sued for technical breaches of the finance documentation or suits based on (often flimsy) local law causes of actions. Indonesian debtors should therefore put in the time and effort to undertake internal legal “house-keeping” in an attempt to identify any legal risks to the maximum extent possible with a view to mitigating them. This is a particularly important exercise in current times because:

 

• The inherent risks of any court process have been further amplified

There are certain risks inherent in any court process. The time and expense of navigating a court process, and bearing in mind that there is often no guaranteed outcome in any court process no matter “who is in the right” during prolonged proceedings, cause significant business disruption given that courts in several countries have been subjected to an extended shutdown. Moreover, even with virtual hearings, courts are operating significantly below full capacity (an earlier co-written piece on the impact of the COVID-19 crisis on debt restructuring in Indonesia is available here).

 

Practice point for international bonds: For international bond issues, there is also the long-standing risk that domestic courts may not give provisions of foreign law bond documentation their “ordinary course” reading to unexpected outcomes (while many such outcomes have favored debtors, they have the equal potential to derail a debtor’s debt restructuring plan as well). As an example, one of the supposed advantages of a trust structure for the issuer was to make it somewhat of a “shield” against the bondholder in that the right to sue under the bonds was effectively in the hands of a Trustee who would exercise this right if and when instructed by bondholders above a certain threshold.   However, in several emerging market countries, domestic courts have not recognized this structure conceptually. In Indonesia, the very concept of a trust structure has been deemed illegal in certain cases, which has meant that a bondholder can only file an individual claim against a debtor in the PKPU, the local Indonesian R&I proceedings (the PKPU) in order for it to be recognized by the Indonesian bankruptcy court.

 

 

• There are certain additional risks around pursuing certain monetary claims

Indonesian companies should bear in mind that the ability to pursue monetary claims against counterparties in certain jurisdictions could be affected if a law has been passed in those jurisdictions (with a view to giving relief to businesses (SMEs in particular) that give a sweeping dispensation to local companies by way of a temporary suspension of the ability to initiate restructuring and/or insolvency proceedings or even regular legal proceedings against them (See as an example Singapore and Australia with further details available here and here). This temporary suspension could, as an example, affect a debtor’s ability to sue its customers for defaulted payments for a period of time which then has to be factored into its cash-flow management strategy vis-à-vis any payments owed by the debtor to its financial creditors.

 

There are also certain recent legal developments around the subject of arbitration and insolvency that debtors should be mindful of. In recent cases before certain courts, the existence of an ongoing arbitral proceeding on monetary claims between a debtor and a creditor has been sufficient grounds for the court to dismiss a winding-up petition filed by the creditor against the debtor. This is not something that a debtor should rely on as an opportunistic shield to block off winding-up petitions as the debtor-friendly rulings issued so far have been highly fact- and jurisdiction-specific. However, to the extent that a debtor was considering filing an arbitration proceeding against a creditor anyway, such developments are a useful reminder of the fact that, as part of this house-keeping exercise, it should closely examine the existence of cross-claims against creditors and the viability of pursuing them as soon as is deemed practicable.

 

5. Strategize and plan for the unexpected regulatory risks

 

Even in a pre-COVID context, regulatory bodies stepping in as “defenders” of the public interest has been one of the unpredictable elements of a debt restructuring. We have already seen this play out, as an example, in Singapore in a pre-COVID scenario, where the Singapore Stock Exchange’s RegCo had stepped in on the Noble group debt restructuring in an effort to champion the cause of the (retail) shareholders vis-à-vis the lenders.

 

The emotive aspects of the COVID-19 crisis may well enhance the risk of regulators increasingly taking on such an activist role particularly where matters of public/national interest are involved. Some of the concerns that have been raised in the past is whether it is legitimate for regulators to get involved in this capacity and indeed whether they have the authority /enforcement teeth to do so (For example, with retail bondholders,  there is a question mark over how retail investors were even entitled to hold the bonds in the first place given securities law restrictions). Notwithstanding this, given the “disruption potential” that any such regulatory intervention can have, debtors should try and pre-empt this to the maximum extent possible including through regular interface, communication and engagement with the seemingly more “vulnerable” creditor classes.