Asset management company

Asset management company

The asset management company (AMC), which is being established
by the government to administer assets left behind by the
recently dissolved Indonesian Bank Restructuring Agency (IBRA)
will certainly be in a much better position to gain a higher rate
of asset recovery.

At least five factors will boost the performance of AMC within
its five-year tenure, even though the company will not be backed
by the extra-judicial powers that were vested in IBRA, and the
assets are the worst of those left over from the 1997-1998
financial crisis.

First, different from IBRA -- which was charged simultaneously
with the challenging tasks of restructuring banks and bad
credits, disposing of assets and managing the blanket guarantee
on bank deposits and claims -- AMC will be responsible only for
managing, maximizing the value of assets, and disposing of the
assets it will take over from IBRA.

AMC is also being incorporated as a limited-liability, profit-
oriented state company, unlike IBRA that was set up entirely as a
government agency and thereby fully subject to arduous
bureaucratic procedures. The AMC board of directors will work
entirely on the basis of a management contract with the Ministry
of Finance. This is strikingly different from the IBRA management
which had always been the target of political party rivalries and
was highly vulnerable to political pressure.

Also different from conditions in 1998, when there were hardly
any financial professionals with expertise in debt recovery
(which was understandable because the country had never before
undergone such a massive financial crisis) AMC can now easily tap
into former IBRA employees who built up experience over the past
five years. Therefore, the finance minister's decision to recruit
all but one of the seven members of the AMC board of directors
from among former senior officials of IBRA simply makes sense.

Managing the distressed assets, maximizing their value and
disposing of them to good investors isn't a simple task. The
process requires high skills and experience in processing bad
debt work-out, with a viable business plan, including packaging
assets to make them more attractive to new investors. This may
boil down to polishing up the assets, or prospecting for gold
within the bad loans and other distressed assets.

It is a great advantage to AMC that the Rp 10.81 trillion
(US$1.27 billion) worth of distressed assets ( estimated market
value) it will take over from IBRA have been verified as clean
and free. That means the legal status of their ownership has been
firmly established and their disposal will not likely risk any
law suits.

This is strikingly different from the conditions experienced
by IBRA. The agency was virtually treated as the dumping ground
for all forms of distressed assets. Certainly, investors will put
a higher value on assets already legally verified as this legal
certainty removes any risk of litigation.

Yet the biggest advantage AMC will have in performing its
tasks is strong macroeconomic and political stability -- now and
within the next five years -- barring any unrest in the upcoming
legislative and presidential elections. Overall stability will
obviously improve the economic outlook, and this in turn will
increase the assets market value and strengthen interest in the
assets to be offered by AMC.

It is not clear how the Ministry of Finance established the
market value of distressed assets, with a total book value of Rp
108.5 trillion, at only Rp 10.8 trillion, or a mere 10 percent of
their book value. The ministry didn't specify which factors were
responsible for such a low market value, or the price at which
the assets from IBRA will be transferred (transfer price) to AMC.
Certainly, the quality of the assets is much lower than that of
those already disposed of by IBRA, with an average recovery rate
of 28 percent (of book value).

We nevertheless are confident that the more favorable economic
and political conditions in which AMC will operate, and the
advantages AMC will enjoy, will greatly contribute to increasing
the market value of the assets and will enable AMC to achieve a
recovery rate much above their transfer price.

Most important though is for the government to establish a
clear strategic directive, business plan and targets, and high
standards of transparency and accountability for AMC to meet, and
to see to it that the AMC board of directors operates without
political intervention.

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