New harmony in Indonesia

IFR Asia 863 - September 27, 2014
6 min read
Asia

Jonathan Rogers

Jonathan Rogers_ifraweb

Jonathan Rogers

It’s rather hard not to get nostalgic at the thought of a successful Asian debt restructuring being completed without the need for a court filing, so rare a sight they are these days.

Add in the familiar setting of Indonesia and a gentleman by the name of Robert Schmitz, and you have all the ingredients for a walk down memory lane. The latter probably won’t want to be described as a veteran, with all the negative connotations that contains in an industry that frequently succumbs to the kind of ageism that prevails in Hollywood. But he’s been at this game for quite some time, and in his latest incarnation at Deloitte in Singapore he’s presided over what may be the first Asian restructuring to reach a harmonious conclusion in over two years.

Like many big-ticket restructurings, the renegotiation of US$825m of debt issued by Indonesia’s Bukit Makmur Mandiri Utama, a mining contractor otherwise known as Buma, has emerged at the end of intense to-ing and fro-ing, although it was completed inside the near three years it took to complete another of Mr Schmitz’s debt workouts, for Indonesian shipping company Arpeni Pratama.

I wouldn’t want to summon up Hollywood as an analogy again and recall the famous showbiz agent Swifty Lazar, who was notorious for his ability to deliver lucrative contracts quicker than any of his peers. But certainly Buma’s 18-month saga stands out in Indonesia for its relatively fast completion, especially with the three-year workout of Berlian Laju Tanker again up in the air. By dealing with a looming cash crunch before default, Buma also managed to avoid the additional complexity and negative publicity that goes with legal proceedings.

THE BUMA REWORK might give hope to holders of Indonesian debt who fear the default call and who have watched the price of paper in key industrial sectors such as coal, telecoms and shipping fall to distressed levels.

As well as the relatively quick completion, the debt revamp chalked up 100% consent, in the process managing to pull together the interests of a diverse range of debt holders, from Singapore sovereign wealth fund GIC to 12 local and international banks. Moreover, the deal was put together during a period when the coal price lost more than 50% of its value.

The slickness of the exercise will be watched with envy by creditors of Bakrie Telecom, who are steeling themselves for a drawn-out legal fight after a group of bondholders filed a lawsuit in a New York court alleging breach of terms on US$380m of offshore bonds. That group may hold around 25% of the paper, but they would do well to note that the enforceability of a US court’s judgment in Indonesia is not a cut and dried matter.

Still, perhaps something along the lines of Buma’s resolution is on the horizon, given that creditor meetings held in Singapore under the auspices of FTI Consulting have, apparently, gone smoothly and a term sheet is in the offing.

ALL THIS COMES as Indonesia has seemingly undergone a makeover in the eyes of global investors thanks to the recent victory in the country’s presidential election by Joko “Jokowi” Widodo. The pipeline for offshore Indonesian public debt deals is filling up. While one can’t exactly cheer a completed debt restructuring as a boost to the country’s credit standing, it’s certainly not an egregious negative, and is a far better outcome than a full-scale corporate liquidation.

Still, despite Jokowi’s reputation as an honest chap who did not engage in any of the “brown envelope” behaviour that characterises Indonesian business while he was governor of Jakarta, you still step into corporate debt issued from the country very much at your own risk. Nevertheless, the “Jokowi effect” has allowed a pipeline to build from a string of debut issuers in the industrial, power and real estate sectors, and more are expected to push deals into the market before this halo effect dims. How quickly that happens is anyone’s guess, but it seems likely that Mr Widodo will enjoy the usual honeymoon period first time presidents tend to be accorded by the electorate.

There’s a strange irony at work perhaps in that the patriarch of the Bakrie group, Aburizal Bakrie, was himself a presidential candidate early on in the campaign, while his family’s company has earned itself a reputation for defaults and debt restructurings that have imposed harsh haircuts on investors.

Has the symbolic moment finally arrived in Indonesia where the old way of doing things is being ushered out and an era of fairness being brought in? If that really is the case then the Buma revamp, the growing pipeline and the optimism of investors towards Indonesia as a credit proposition all tick the box.

The Bakrie Telecom negotiations may yet add to that perception, if foreign bondholders agree that they are getting a fair deal. If talks break down in the face of corporate obstreperousness, however, they will only serve as a reminder that the optimism that accompanies the arrival of a new leader is often a false dawn. I’m not so much thinking of President Barack Obama when I say this, but the tendency among Asia’s entrenched elites to keep everything as business as usual. We should find this out in Indonesia over the next few years, if not before.

Jonathan Rogers_ifraweb