Saturday, 20 October 2018

Securitisation 2005 - Indonesia at last, but slowly

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After years of unfulfilled promises, the market for securitisation in Indonesia may be about to take off. Structured finance specialists have finally been successful in lobbying the Indonesian authorities to look favourably on ABS deals. But as Luc Mongeon reports, the market’s development will only be gradual, as investors remain wary.

Though Indonesia was one of the hot markets for Asian ABS before the Asian financial crisis – with at least six deals in a couple of years – none have emerged since, as until recently no one had been able to structure a product that met the originators’ needs.

Indonesian corporates have been keen to issue ABS but were not interested in offshore deals because of currency risks or being unable to find banks willing to provide swaps. The alternative – issuing a domestic ABS denominated in rupiah – was also impossible because certain laws and tax regulations have until very recently raised doubts as to whether it was possible to have a genuinely bankruptcy-remote, tax-free structure.

“After ABS transactions first surfaced in 1995, Bapepam [the capital market regulator] in 1996 began drafting regulations, and took the position that because securitisations involve selling a pool of assets and issuing assets backed by securities, they are similar to mutual funds. So what they [Bapepam] did is adopt this Kik-eba [collective investment contract] concept for securitisations,” said Soebowo Musa, CEO and principal of Kiran Resources Indonesia, a structured finance boutique.

The problem with the collective investment contract (CIC, or Kik-eba) format, at least in the Indonesian context, has been that it was not a clear-cut bankruptcy-remote structure, said Musa. And until recently, the Indonesian tax authorities were unclear as to whether or how the Kik-eba were taxable.

But early this year, Bank Indonesia (BI) released guidelines regarding securitisations, which state that Indonesian banks can participate in securitisations either as originators or investors, as long as they can show that the structure is a “genuine” ABS structure.

“The BI regulations are written in a way that gives flexibility in terms of packaging securitisations. It is essentially leaving it up to the market to decide how the final product can be packaged, so long as the structure meets the Bank Indonesia guidelines,” said Musa.

It follows, therefore, that BI’s regulations do not prohibit rupiah securities being issued by an offshore entity. What does stand in the way of the deal, though, are separate regulations from Bapepam. However, as Bapepam regulations only apply to public offerings, they can be avoided by issuing as private placements.

Thus in March, BFI Finance Indonesia surfaced with a deal that seeks to take advantage of the new environment. The three-year Rp108bn (US$11.5m) MTN deal, which is backed by rupiah-denominated heavy equipment leases, is a private placement and, for tax reasons, makes use of an SPV based in the Netherlands, as the Netherlands has a tax treaty with Indonesia.

The deal, structured and arranged by Kiran Resources and underwritten by Danareksa Sekuritas, is considered a domestic transaction given that everything, except the offshore SPV, is Indonesian. It is expected to close by the beginning of June.

Soon to follow is a Rp500bn–Rp700bn ABS offering from Federal International Finance (FIF), which is to be structured as a Kik-eba. No details of the transaction are available yet, but arranger Kresna Securities is said to have cleared regulatory and tax hurdles.

The market for securitisations also was given a lift in February this year, when President Susilo Bambang Yudhoyono signed a decree for the government to create the Secondary Funding Facility, which is to start a market in secondary mortgages.

But despite these breakthroughs, the ABS market is likely to grow slowly simply because Indonesian investors are not familiar with the product and because of Indonesia’s unpredictable legal environment.

“Hardly anyone in the Indonesian investment community believes that you can have something that is bankruptcy-remote here. It is in most people's mind academic because, given the way the courts work in this country, you can never be certain that things will go as planned,” said one investment banker.

Meanwhile, there is hope that the market for cross-border Indonesian ABS deals can be revived. Merrill Lynch is working on a US$500m–$600m securitisation for Indonesian coalmine operator Bumi Resources that – assuming it makes it to market – could be the first cross-border securitisation from Indonesia since 1998.

As usual with Bumi transactions, the deal is an attempt to square the circle of extremely attractive receivables produced by the company’s low-cost, high-quality mines with its ownership by the controversial Bakrie family, plus the added country risk associated with Indonesia.

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