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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