Indonesia's coal offers a cautionary tale for creditors

IFR Asia 948 - June 25, 2016
6 min read
Asia

Forgive my returning to Indonesia just a week after my last column on the topic but it’s worth the deja vu, since a big(ish) restructuring over there is winding its way to the supposed finish line and it shines a light on much else besides.

Plus, as the news of Brexit in my home country sinks in, you might welcome some diversionary relief about a country we maybe don’t know enough about, at least from a fixed income investor’s perspective.

Berau Coal, Indonesia’s fifth largest black gold producer, is attempting to reach the final stages of a debt restructuring which kicked off last July when the company failed to redeem US$450m worth of bonds.

Those bonds, plus another US$500m of paper due next year, are the subject of a debt consolidation exercise which shines a light on the global fossil fuel price meltdown, Indonesia’s contrarian energy policy and the perils of the country’s corporate funding landscape.

The details are rather sketchy, but the market can provide the underlying narrative. By that I refer to the secondary prices quoted on the defaulted 2015s and the looming redeemable 2017s, which were both quoted last week around the early 20s mark.

That’s better than the early teens that were seen a few weeks back, and a likely measure of the market’s response to the possible terms of the workout which is now on the table.

But who is trading the paper? The story among bankers who have been following the story is that numerous funds which once held the debt during the glory days of coal prices have dumped it. This not because of the sensation of a lousy restructuring outcome, but because these said funds have deserted the region on the back of a general retrenchment in the asset management industry regionally.

That might just be a rather glib, or dramatic explanation. The better reasoning is that it’s best to get out now while there’s a semblance of meat on the price of the mineral rather than waiting until later when only slim pickings are going to be available.

But then there’s Indonesian coal. Yes, the country’s mines are packed with oodles of high quality thermal coal, but the demand has dropped. Much of that during the coal boom came from China, which needed it to fuel its steel-smelting furnaces. That demand has collapsed, alongside China’s steel industry.

More to the point, shipping the coal to Latin America, another big source of demand, has become prohibitively expensive, even in the face of slumping oil prices and global shipping rates. Relative costs have soared and the leverage assumed by Indonesia’s coal producers has become unsustainable.

You wonder how the supposed advantage of disintermediation from bank funding to public bond funding will play out. We know that Standard Chartered Bank is on the hook for a US$1bn loan - which was made together with Austria’s Raiffeisen Bank International - to purchase London-listed Bumi under the aegis of Indonesian coal tycoon Samin Tan. Some US$740m is outstanding at StanChart’s end.

Word on the street is that StanChart will be lucky to get 10 cents on the dollar in restitution for that foray into the long gone world of torrid global coal prices.

Meanwhile the man who may yet may level the playing field in Indonesia’s mad rush of coal restructurings is local lawyer Hotman Paris Hutapea, who is trying to find a legal angle which would see much of the debt built up in the industry struck off on the basis of arguments invalidating collateral. Indonesian coal is owned by the nation, so Mr Paris’ argument runs, and therefore cannot be pledged against debt without due notice, which in most cases it was not, according to him.

That’s an argument which will scare existing holders of Indonesian coal debt, be in bond or loan form.

But of course Hotman Paris’ line of argument begs the question of quite what the appropriate workout price should be for the acres of Indonesian coal debt currently at various stages of reconstruction, absent the collateral line of thinking.

One suspects somewhere around the 20 cents on the dollar last seen on Berau’s two pieces of outstanding debt. Of course, from a bond creditor’s point of view, there is the eternal hope that lies in the terming out solution of a workout with a haircut that reasonably represents the value the secondary market places on the outstanding debt.

In the case of Berau it’s a rumoured 10-year bullet with a possible sharing of returns with equity holders, and the option of partial early redemption at the issuer’s discretion.

Right now, that might seem a reasonable outcome. There’s the hope that Indonesian president Joko Widodo’s pledge to fast-track the construction of reams of coal-fired power plants will form a rescue. That might help your off-take agreements if you’re a Berau, even if it fails to chime with the global zeitgeist on energy policy.

But it will do nothing to determine the globally set price of coal. In the face of the renewable energy revolution, the Paris COP21 climate agreement and the collapse in the price of oil, creditors’ hopes look optimistic. If I were them I would take what I can get now and write the whole thing off.

Jonathan Rogers_ifraweb