Beyond the handshake: The enduring journey of debt restructuring

Navigating the post-restructuring landscape

Following a restructuring, companies typically remain under close scrutiny. Creditors may stipulate regular submissions of cash flow projections, financial updates, and compliance reports. The specifics – frequency, detail, and format – are usually negotiated as part of the restructuring terms, and tailored to creditor needs. In more intricate scenarios, creditors might insist on appointing an independent financial advisor, a cash monitoring agent, or a payment agent to oversee the company’s financial conduct.

Fortifying creditor interests

Cash waterfall mechanisms, which define a predetermined order for distributing all incoming funds (e.g. operational costs, taxes, debt repayments), are crucial for safeguarding creditor interests. The misdirection or diversion of funds outside this agreed-upon sequence is a common trigger for post-restructuring disputes and must be rigorously prevented through strong contractual enforcement.

Equally important are financial covenants and performance benchmarks, such as limits on leverage or minimum profitability thresholds. These metrics are vital for tracking the borrower's progress and enabling creditors to intervene proactively if the recovery effort falters. Clear reporting obligations and unhindered access to financial records are indispensable for enforcing these protections.

The legal backbone of sustained recovery

From a legal standpoint, restructuring documents must meticulously anticipate potential non-compliance. This includes explicit remedies for covenant breaches, defined escalation steps, and clear dispute resolution mechanisms like arbitration or specified jurisdiction. Lacking these, disagreements may lead to drawn-out litigation or formal insolvency proceedings, such as, for example, Indonesia's Suspension of Debt Payment Obligations (PKPU), a court-supervised insolvency proceeding akin to Chapter 11 in the United States.

Recent restructuring cases in Indonesia vividly demonstrate that lax post-restructuring oversight can quickly result in renewed defaults. In stark contrast, successful outcomes are consistently underpinned by continuous engagement among stakeholders, well-defined contractual frameworks, and actively enforced rights.

Continuous commitment to recovery

Debt restructuring is not a one-time fix ­– it's a dynamic transition. For debt restructuring to truly succeed, it must be supported by enforceable post-restructuring obligations that cultivate transparency, accountability, and the alignment of interests. Legal advisors are instrumental not only in negotiating the initial restructuring terms, but also in designing the enduring post-restructuring framework that ensures sustained recovery and pre-empts future disputes.

In a real case involving an Indonesian specialty chemicals producer, insufficient oversight and lack of enforceable post-restructuring controls allowed financial discipline to slip, resulting in a repeat default and a second PKPU process less than three years after the initial restructuring.

A well-executed restructuring doesn't end when the ink dries; it continues through robust post-restructuring governance that guarantees the agreement withstands the test of time.

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Yandhi Surya is a partner at Protemus Capital. He believes that every business has its own unique characteristics. Through Protemus, he is set to realise a strategy and approach designed specifically for each transaction.