Thursday, 18 July 2019

Behind closed doors

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Indonesia’s Gajah Tunggal proved there is life after restructuring with its return to the global bond markets in January. New defaulters, however, are using Chapter 15 of the US bankruptcy code to rush through local workouts, leaving questions over their ability to court global investors on future financings.

A three-year-old boy looks out from a door of a classroom in Tenglong kindergarten.

Source: Reuters/Jason Lee

A three-year-old boy looks out from a door of a classroom in Tenglong kindergarten.

Indonesia has been the biggest source of debt restructurings in Asia over the past 15 years, with many rehabilitated companies managing to return to the capital markets. It also won a coveted upgrade to investment-grade status early last year.

Recent developments, however, suggest the risks for international creditors are not falling, but going up.

Indonesian tyre-manufacturer Gajah Tunggal is a recent example of a company with a history of debt restructuring returning to tap the market. Gajah Tunggal completed a restructuring in 2004 and was able to return to the US offshore public market just a year later with a US$400m 10-year Reg S trade. In January this year, the company reduced its coupon payments substantially with a US$500m five-year Reg S deal, again proving that investors do not necessarily see a history of debt restructuring as a red flag.

As with Gajah Tunggal, many Indonesian restructurings date back to the region’s financial crisis in 1998, when a currency slump triggered a mass of defaults on US-dollar debt and the government established the Indonesian Bank Restructuring Agency to purchase stakes in the equities and debts of the troubled companies. The country, subsequently, produced some rich pickings for vulture funds, which bought the debts at deep discounts and worked to restructure the paper, often with spectacular gains.

Much of the IBRA-held debt has been restructured in the 15 years since the crisis. Over the past five years, however, there have been some notable defaults, with large-scale workouts emerging for Indonesian airline Garuda, cocoa processor Davomas Abadi and shipping firms Arpeni Pratama Ocean Line and Berlian Laju Tankers. In the case of the Arpeni Pratama and Berlian Laju, an approach was adopted that has created an uneasy precedent: the invocation of Chapter 15 of the US bankruptcy code.

Arpeni Pratama was the first Indonesian firm to seek and obtain Chapter 15 protection in the US. In the process, it was able to win protection against US court actions on a total of US$241m of debt, comprising a bond and loan facilities. Effectively, this means US creditors must comply with decisions taken in the Indonesian courts, which are venues known for unpredictable judgements.

This is no one-off trick because Berlian Laju took the same step last year on its US$2bn debt restructuring.

The Arpeni Pratama workout resulted in a big haircut for investors, but allowed the business to remain an ongoing concern and, generally, was regarded as a fair and transparent process with onshore and offshore creditors getting equal treatment.

The ongoing Berlian Laju restructuring is now emerging as the next big test of Indonesia’s ability to deliver a solution to a complex network of competing claims in the face of multiple applications to have the company wound up.

Indonesia’s bankruptcy law allows a company to be granted a debt moratorium under a Penundaan Kewajiban Pembayaran Utang, or composition plan, until a suitable restructuring proposal is agreed. The moratorium comes with strict deadlines, but extensions are common. Berlian Laju was put into a PKPU last June, following an application from creditor Bank Mandiri, which is owed US$26.8m on a shipping loan.

A Singapore-based restructuring lawyer has described the Berlian Laju restructuring as a “test case” that will provide a precedent for subsequent restructurings in the country.

“You can’t retain a ‘Mexican standoff’ position and the credibility of the bankruptcy law. The PKPU on Berlian Laju has already gone through a few deadlines and extensions been granted. At some point, the courts have to take a firm stand under the terms of the law,” the lawyer said.

Another dispute is brewing over cocoa firm Davomas Abadi, which went into restructuring in 2009 after missing a US$13m coupon payment on its US$238m due 2011 bond.

Davomas termed out the paper to 2014 with a 50% creditor haircut and, subsequently, defaulted on that restructured bond in March 2012. While the company said it had agreed a debt-to-equity swap in a Jakarta court last June, it was still facing claims from angry stakeholders, who claimed they were left out of that process. Both sides have resorted to legal action to settle the dispute.

“The growing use of Chapter 15 and Davomas’ filing of a counter suit should prompt investors to treat Indonesian credit with care,” said a Singapore restructuring adviser.

“Investors will be watching the outcome of these two as a benchmark for what to expect from future Indonesian workouts.”

To see the digital version of this report, please click here.

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