Strategy for Recovery from Indonesian Financially Distressed Companies in Crisis

S A R I P A T I Vol. 13 | No. 1 ISSN: 2089-6271 | e-ISSN: 2338-4565 | https://doi.org/10.21632/irjbs

At the time of writing, the International Monetary Fund (IMF) declared a global economy recession due to pandemic crisis. The spread of coronavirus shut down many companies and put them in financial distress. Many previous studies investigate the strategy for firms' recovery in normal economic condition. However, firms may adopt different strategies during crises. The Asian crisis is a well-known example of a temporary, but stiff contraction across industries. In this case, troubled firms demand certain corporate strategies to recover from the crisis. The main purpose of this study is to undertake an empirical examination of Indonesian financially distressed firms as they strive to recover during the severe crisis. It compares the strategy between recovered and nonrecovered firms. Successful strategies for recovery are identified through Altman's Emerging Market Score. The strategies involve four types of restructuring such as operational, financial, asset, and management restructuring. This study uses the number of employees decreased, debt restructuring, disposal of assets, and change of the CEO as the proxy of the respective types of restructuring. The success of debt restructuring appears to be the most important differentiator of recovery.

INTRODUCTION
Indonesia was badly hit by the Asian Crisis more than its East Asian neighbours. Its economic contraction was deeper and more prolonged.
The crisis, which started in mid-1997, depreciated Indonesian currency by one-sixth between 1997 and 2002. This led to a contraction of the economy, making Indonesia's real GDP growth minus 13.7% and inflation rate 58.5 % in 1998. The collapse of the financial markets resulted in the decline of economic activity in most major sectors, including banking as an intermediary market. All sectors, except agriculture and utilities, encountered negative growth. The worst affected sector was construction (-39.7%), followed by services (-16.8%) and manufacturing (-12.9%).
At a deeply depreciated exchange rate, the presence of un-hedged short-term dollar borrowings to finance long-term investment is one of the microspecific issues. In addition, Indonesian firms also encountered high interest borrowing rates since the central bank raised the interest rates of currencies in attempt to stop the fall in the exchange rates (Tse 2000). The situation above made 30% of the Indonesian corporations technically insolvent. This is in the sense that the values of their equities were less than that of their liabilities in that year, after accounting for the changes in the exchange and interest rates. This shows that they struggled for recovery in a severe situation (Claessens, Djankov and Ferri 1999;among others).
The purpose of this paper is to examine the strategies for recovery from Indonesian financially distressed companies during the Asian crisis. The crisis was a well-known example of a temporary, but stiff contraction across industries to demand the implementation of certain strategies in response to such a crisis. The choice and design of these strategies, together twith their effectiveness in allowing companies to regain financial health, have been widely debated in the literature.
The evidence reported in the paper is obtained from a sample of 29 Indonesian financially distressed companies. Only 55% (16) of those companies recovered within 10 years compared to the 35 months median time spent by distressed companies in Kahl's study (2002). The evidence supports that financial strategies are suitable for the successful recovery during the crisis.
The remainder of the paper is organized as follows.

Literature Review
Turnarounds are dynamic processes comprising a sequence of activities leading firms from a situation of decline to a period of sustained success or organizational failure (Sheppard & Chowdhury 2005). Recovery is one of the phases in a turnaround process. It can generally be classified into efficiency and entrepreneurial / growth-oriented strategies. In recovery strategies, firm should continue to pursue profitability or implement growth-oriented moves.
However, some studies suggest that cut back and restructuring initiatives, not entrepreneurial Previous studies provide some support for the requirement of stable operations for recovery. The efficiency oriented strategies aim to stabilize firm's operation. They address cost reduction, revenue generation and operation-asset reduction programs to cut down direct costs and overheads whilst maintaining or improving production. The growth oriented strategies seek to restore profitability. When the cause of decline is an industry contractionbased, some papers suggest less relatively strategic change for recovery (Falkenberg et al. 2004).
Lasfer and Remer (2010) analyze the strategies undertaken by financially distressed companies in UK that apply following 4 main generic restructurings strategies in their study.

Operating Restructuring
The efficiency oriented strategies aim to stabilize a firm's operation. They address cost reduction, revenue generation and operation-asset reduction programs to cut down direct costs and overheads whilst maintaining or improving production. When the cause of decline is an industry contractionbased, some papers suggest less relatively strategic change for recovery (Falkenberg et al. 2004).
Sudarsanam and Lai (2001)  given equity securities (Gilson et al. 1990). Second, the creditors may liquidate either completely or partially. The liquidation process can use court (formal) or out-of-court (informal) procedures. The difficulty in liquidation decisions is avoiding the destruction of on-going value by liquidating more than the optimal amount of hard assets. If a firm liquidates (completely or partially), the destruction of the going-concern value is the cost of financial distress (John 1993).

Asset Restructuring
Shleifer and Vishny (1992) consider the scenario where a firm reacts to financial distress by selling assets. They identify three factors determining the market liquidity of the firm's assets. The first is the number of potential buyers in the market; the second, the characteristics of the assets being sold.
If the assets are industry-specific, an inside buyer is likely to value the assets more highly than an outsider. However, even if the inside buyer is more likely a higher bidder; the selling firm may sell to an industry outsider when the industry itself is in trouble. When firms encounter trouble in repaying debts and attempt to sell their assets, the highest valuation buyers of these assets are likely to be other firms in the same industry. The third is the financial condition of the industry. If the industry where the firm operates is distressed, it will affect the liquidity of the asset; a poor financial condition in an industry will increase the liquidity premiums of assets. The premium may be reduced if the asset is used in other industries. However, the industry outsiders who may not know how to manage them will encounter agency costs of hiring specialists to run the assets and fear overpaying since they have no knowledge of the assets' value. When there are no industry buyers to buy the assets and the only buyers are industry-outsiders, they will charge significant fees for managing and acquiring the assets. Consequently, the price of the assets will be depressed.

Management restructuring
Previous studies indicate the importance of leadership change during financial distress. The replacement of CEOs is common and it does not directly involve cash. Whitaker (1999) (Gilson 1990). After this screening, six firms were not supported by restructuring news and the remaining sample contains 29 financially distressed firms ( Table 2).

In
Most of the firms (16)  They are in between Gilson's (1990) (Table 3).
The year of recovery is the year when the Emerging Market Score (EM Score) reaches more than the EM Score equivalent to US investment grade (Altman 2005) and firms show positive operating cash flow.
The Altman EM Score is an enhanced version of the statistically proven Z-Score (Altman 1993 To examine the strategies of recovered and nonrecovered firm, I do tests equality for recovered and non-recovered samples based on t-test, F-Stat for two independent samples to test the hypotheses.

RESULTS AND DISCUSSION
Half of the firms in the sample (48.3%) recovered within 5-6 years. The median is 4 years. The rest (2 firms) spent 9-10 years to recover and 10 firms  Interest coverage is defined as the ratio of the earnings before interest, taxes, depreciation and amortization (EBITDA) and interest expenses. Book leverage is defined as short-term debt plus long-term debt divided by the same expression plus the book value of common equity.

CONCLUSION, IMPLICATION, AND LIMITATION
Research in recovery has been dominated by the investigation of turnaround in normal economic condition. Many of those studies suggest that efficiency oriented recovery strategies is important.
However, this operational action may be necessary but not a sufficient condition for recovery in the crisis situation.
This study examines Indonesian financially distressed firms' strategy to recover during the Asian crisis. The crisis is very severe in the sense that Indonesia encountered both serious economic and financial issues that were accompanied by political reform. In this situation, the firms may apply operating, financial, asset and management restructuring. The results of this study supports the standard theory of turnaround and the practice that maintaining liquidity is a key of successful recovery.
However, more successful financial restructuring appears to be the differentiator between recovered and non-recovered firms.
Two important limitations should be taken into consideration when it comes to applying the research findings. Firstly, the prediction of recovery depends on EM Score values with equivalent to investment bond rating. This could make the Most of recovered and non-recovered firms did operating, financial, asset and management restructuring. Proportion firms that succeed in debt restructuring are significantly bigger in recovered firms than in non-recovered firms.
*** Significant at the 1% level; ** Significant at the 5% level; * Significant at the 10% level. and competitive position, will play in the recovery process. A priori, distressed firms that enjoy a high level of stakeholder support are more likely to survive, as these firms will have continual support from creditors, employees and customers.