Foreign investors resist Indonesian temptation<\/p>\n
HONG KONG (Reuters): Indonesia's Bank Restructuring Agency
\n(IBRA) wants to clean up the country's biggest financial messes
\nthis year, but success hinges on finding a way to tempt back
\nbadly burned and deeply skeptical foreign investors.<\/p>\n
Unattractive rates of return, concern about behind-the-scenes
\ninfluence of disgraced tycoons and a perceived prejudice against
\nforeigners are powerful antidotes to the allure of inherent value
\nthat Indonesian assets hold for overseas investors.<\/p>\n
But bankers say they may be enticed if asset prices are cut
\nfurther and investors focus on the potential of key industries.<\/p>\n
\"The trick is to make sure you're buying the future, not the
\npast,\" Vincent Fan, chief executive of private equity fund
\nmanager CVC Asia Pacific Ltd, told Reuters.<\/p>\n
\"But fund raising is a difficult prospect. Lenders aren't
\nprepared to go back,\" said Fan, who manages US$750 million, none
\nof which he spent in Indonesia last year, preferring South Korea.<\/p>\n
IBRA managed to beat its $2 billion asset sales target in 2000
\nwith a cocktail of solutions shifting everything from equity in
\nfirms across Indonesia's economic spectrum, to part of a $30
\nbillion mountain of mainly dollar-denominated distressed debt.<\/p>\n
But despite acknowledging IBRA is doing its best in tough
\ncircumstances, the country's volatile political risk and
\ncorruption-tainted record keep overseas investors away.<\/p>\n
Indonesia came bottom of the league for new international
\nsyndicated loan financing for the second year running in 2000,
\nsecuring just $1 billion of the $187 billion issued last year in
\nthe Asia Pacific, according to Reuters' Loan Pricing Corp unit.<\/p>\n
Mainly to blame is huge Indonesian exposures banks retain,
\nagainst which they provision up to 80 percent of the value of
\nfresh loans rates of return on which are not that attractive.<\/p>\n
Two refinancings last year -- for Indofood and Indah Kiat --
\nearned investors about 300 and 475 basis points (bps)
\nrespectively over the London Interbank Offered Rate (LIBOR).<\/p>\n
\"Take that in relative value terms and compare it to bond
\nspreads for Indonesia and it's not sufficient,\" said Tong-Poh
\nTay, managing director of Asia Pacific global syndicated finance
\nat JP Morgan in Hong Kong.<\/p>\n
Indonesia's sovereign bond due in 2006 was quoted at about 690
\nbps over LIBOR's 548 bps level on Friday. Investors could easily
\ndouble that for taking a risk on corporate bonds.<\/p>\n
Potential<\/p>\n
Loans do offer some potential though for banks which have
\nwritten down portfolio values since the financial crisis struck.<\/p>\n
\"If they sell for 40 cents on the dollar it's better than the
\n25 cents they're marked at in the book. You'll actually write a
\nbit of profit,\" said David Matthews, Barclays Capital Asia global
\nloans director, once a lender to the debt-ridden power sector.<\/p>\n
The potential in restructured assets is Indonesia's allure.<\/p>\n
\"But if you're looking at restructuring stories, you want to
\nbe in distressed debt, not distressed equity which can be worth
\nzip. With debt you're higher up the food chain,\" said James
\nSquire, director of Asian equities at Baring Asset Management.<\/p>\n
International equity liquidity in Indonesia is so marginal
\nthat it accounts for just one percent of benchmark weightings in
\nthe region and most fund managers are underweight even that
\nlevel.<\/p>\n
Fixed income investors though say Indonesia's debt story --
\nespecially distressed paper -- is better than Thailand or Korea.<\/p>\n
\"In Indonesia you've got a lot of companies with a lot of
\ndebt, almost all of which is in dollars, and that makes for a
\npotentially more interesting market for foreigners who don't want
\nto take the currency risk,\" David Boren, global strategist at
\nLondon-based emerging markets fund manager, Montpelier.<\/p>\n
IBRA says its total loan portfolio is about $30 billion
\ndollars, and says some 68 percent of it has been restructured.<\/p>\n
HSBC Bank forecasts Indonesia's external obligations to be 111
\npercent of gross domestic product in 2001, four times that of
\nKorea. Debt servicing costs relative to exports are seen at twice
\nthat of the Philippines, Asia's second most indebted country.<\/p>\n
Montpelier manages $250 million of global emerging market debt
\nand holds more than half its Asian Debt Fund in Indonesia which
\nhad returned investors 24.2 percent on a one year basis as at the
\nend of November 2000, the latest figures available.<\/p>\n
Transition credits -- defaulted bonds restructured into
\nperforming assets -- could be the way mainstream investors come
\nback to Indonesia because rehabilitated bonds are standalone
\npaper without the complications of the distressed debt.<\/p>\n
Satellite communications company Satelindo already has a $215
\nmillion restructured promissory note transition credit in the
\nmarket and could be joined by PT Indocement and independent power
\nproducer, PT Paiton Energy later this year, market sources say.<\/p>\n
Montpelier's Boren is bullish on restructured bank debt,
\nseeing a trade-off between state-guaranteed bank recapitalization
\nbonds, flush bank liquidity and tighter sovereign spreads.<\/p>\n
The finance sector -- particularly consumer finance -- is also
\nattractive to Ascanio Martinotti, a managing director of JP
\nMorgan Partners, the bank's private equity arm.<\/p>\n
Consumer spending is a huge driver of the Indonesian economy,
\ngenerating about 73 percent of GDP according to third quarter
\n2000 data, versus a global average of about 60 percent.<\/p>\n
\"If you insulate yourself from corruption risk, if you keep an
\neye on your costs, set up a good distribution network, are in the
\nright sector like the consumer sector and you manage your
\nbusiness properly, you make a lot of money,\" Martinotti said.<\/p>\n
But Martinotti, an investor in Indonesia since 1993 who
\ntravels there weekly to scout out deals, has yet to make money
\nfrom IBRA sales which he says favor local, not foreign buyers.<\/p>\n
He has competed in two IBRA auctions with Chase Manhattan Bank
\n-- which bought JP Morgan last year -- but says while IBRA is
\nstaffed with Indonesia's best brains, political pressure stops
\nasset sales at terms overseas investors are willing to accept.<\/p>\n
Investors also perceive reluctance among IBRA executives to
\nrestructure too vigorously as once IBRA's work is done, they will
\nhave to seek jobs with firms and tycoons they have been tough on.<\/p>\n
While supportive of efforts to rebuild the economy on a more
\nsolid foundation, Martinotti sees most restructuring done outside
\nthe IBRA process, which is where he concentrates his deal making.<\/p>\n
\"If there's any restructuring it's happening in the private
\nsector, driven by market forces and that has been happening. On
\nthat type of restructuring, I'm quite optimistic. I might be a
\nlonely voice, but things are not as bad as they look,\" he said.<\/p>",
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