Friday, 19 December 2014

Indonesia’s fairy tale can’t promise a happy ending

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The rehabilitation of corporate Indonesia since the horror movie of the Asian financial crisis has been remarkable, but investors still need to beware of a sequel, says IFR’s Asia Pacific bureau chief Nachum Kaplan.

Nachum Kaplan, IFR Asia-Pacific Bureau Chief

Talk is that a new wave of Indonesian corporate defaults and restructurings will be coming soon to a cinema near you. The question is whether it will be a slow drama that makes you wish you had gone for the large popcorn instead of the small one – or a 1950s-style B-grade horror, where more and more creditors get mauled as the monster takes over the town.

At stake is the bigger question of how far Indonesia – once a pariah but now a golden boy – has really come. Indonesia’s transformation over the past 15 years from a dictatorship and economic basket case to a democratic tiger economy with strong growth, well-capitalised banks and a thriving local bond market is truly impressive.

Those achievements deserve praise, but they tell only part of the story. After all, it is hard to think of many democracies where a candidate can remain a leading contender for the presidency even as companies bearing his name struggle to meet their obligations. Yet that is exactly the case. Bakrie & Brothers breached covenants in April on a Credit Suisse-led $437m loan collateralised against shares in Bumi PLC, just as late last year the company went into technical default on a previous US$1.3bn facility. Another Bakrie-linked business, Agri International, has just narrowly avoided defaulting on a US$150m bond. Despite this, family patriarch Aburizal Bakrie has already won his party’s blessing to run for Indonesia’s presidency in two years’ time.

Bakrie companies are hardly alone in their chequered past, as infrastructure conglomerate Jababeka reminded investors last week when it opened books on a high-yield bond. Jababeka has defaulted twice but, worse than that, the circumstances around those defaults should remind everyone of just how scary an Indonesian horror film can be.

In the aftermath of the Asian Financial Crisis in 2001, Jababeka signed a US$325m debt restructuring with offshore creditors, who agreed to an 80% haircut. The Indonesian Bank Restructuring Agency (IBRA) held half the exposure. Nine months later the company defaulted again in the most bizarre circumstances. It missed a bank repayment after apparently paying the money into the wrong account. Creditors then had to endure a further 74% haircut on the remaining debt – then a much smaller amount thanks to the first restructuring. IBRA, with timing that even Roger Federer would envy, sold its exposure three months before the second default.

That all happened a decade ago. Investors, however, haven’t completely forgotten Jababeka’s experience. The company on Thursday completed a US$175m bond, but only after agreeing to a hefty 12% yield. It also had to add more covenants to keep investors interested, and pared back its target from earlier talk of US$200m–$300m.

Indonesia has made some great strides. But, from an investor perspective, the real test of the country’s rehabilitation lies not in how much investors are willing to invest, or how hot the bond market might be. Rather, it is how those investors will be get treated when things next go wrong.

That movie has yet to get beyond the storyboard stage, and we do not know when it will be released or what is in store. What we do know, however, is that the monsters in horror films are very hard to kill. And they have a nasty habit of coming back in the sequel.

Follow @NachumKaplanIFR

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