Bank Mandiri to take over publicly listed BII

JAKARTA (JP): The country's largest bank, state-owned Bank Mandiri, will take over publicly listed PT Bank Internasional Indonesia (BII), in what could be the government's last bid to rescue BII from the burden of its massive nonperforming loans.

Finance minister Rizal Ramli on Monday called the acquisition a positive step toward consolidating the banking sector.

"The government guarantees and supports this acquisition," said Rizal at a press meeting late on Monday.

Acquiring BII would broaden Bank Mandiri's access to the retail market, said Bank Mandiri president E.C.W. Neloe.

Bank Mandiri, itself the result of a merger between four state banks, has been unable to gain a strong foothold in the retail market following its inception in 1999.

Neloe expected the acquisition to be finalized by September at the latest.

Many see the acquisition as a scheme to bail out the financially troubled BII without the necessity of going through a second recapitalization program.

BII, plagued with large nonperforming loans, is feared to be unable to meet the minimum capital adequacy ratio (CAR) requirement of eight percent this year.

To raise its CAR level, BII must either inject more capital or reduce the amount of nonperforming loans.

BII's biggest woes stem from massive nonperforming loans extended to the affiliated Sinar Mas Group, the bank's former majority owners. These loans, amounting to US$1.3 billion, account for about half of the bank's total loans.

Now the bank faces problems in recouping the loans from the debt-ridden Sinar Mas group, thereby threatening to further lower its CAR level.

It's current CAR level stands at around nine percent and is likely to fall under the minimum eight percent should Sinar Mas default.

The government, via the Indonesian Bank Restructuring Agency (IBRA), has issued a blanket guarantee to cover any shortfall in debt payments by Sinar Mas to BII.

Sinar Mas' Singapore-based Asia Pulp & Paper (APP) has imposed a moratorium on its debt payments worth $13 billion to foreign and local creditors.

Rizal said that under the acquisition plan, the government would take over Sinar Mas loans from BII's balance sheet, and replace them with government bonds plus restructured loans from IBRA.

The bonds to be injected are excess recapitalization bonds, called recycle bonds, owned by local banks.

Rizal said the usage of the recycle bonds had been approved by the House of Representatives' budget committee.

"Providing the usage of the recycle bonds remains within the parameters of the state budget, meaning it should not burden the budget," he explained.

Since recycle bonds are part of recapitalization bonds, the current state budget already includes the cost of servicing their interest payments.

Legislators have declined to approve more recapitalization bonds for undercapitalized banks, facing the government with the difficult option of liquidating those banks.

Liquidation, however, is the least-favored option, as it could lead to the collapse of other healthy banks.

So far, Rizal has rejected the notion that the acquisition of BII was aimed at bailing out the bank, but officials at his ministry suggested otherwise.

"We are committed to returning BII to financial health," said IBRA chairman I Putu Gede Ary Suta.

Moreover, the acquisition of BII by Bank Mandiri may also be a way out for IBRA to avoid executing the blanket guarantee, since under the acquisition plan the agency would take over Sinar Mas loans.

"We will take over the Sinar Mas loans, and the restructuring work will be an issue between IBRA and the Sinar Mas Group," he said.

But he fell short of explaining whether after the acquisition, the blanket guarantee for the Sinar Mas debts would remain in effect.

IBRA's blanket guarantee will almost certainly force the agency to repay to BII the debts on which APP has imposed a moratorium.

Sinar Mas did surrender collateral to IBRA amounting to some 145 percent of the $1.3 billion it owes to BII. But selling the assets may take too long.

According to IBRA deputy chairman Felia Salim, APP has already missed out on a payment due on June 30 to BII. (bkm)