Bank Mandiri to take over publicly listed BII

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)