Banks allowed to trade up to 25% of bond portfolio

Banks allowed to trade up to 25% of bond portfolio

JAKARTA (JP): Bank Indonesia said on Wednesday it would allow
recapitalized banks to trade up to 25 percent of the outstanding
government recapitalization bonds they hold for stapled bonds, up
from the original ceiling of 15 percent.

Bank Indonesia deputy governor Miranda S. Gultom said the
measure was in line with the new policy that will make the
recapitalization bonds more attractive to investors.

"Starting on Friday, they can trade up to 25 percent of their
respective bond portfolios," Miranda said during a media
conference.

Miranda said that approaching the Wednesday deadline to trade
the bonds, 13 recapitalized banks had applied to the central bank
to exchange part of their recapitalization bonds, worth a total
of Rp 58.47 trillion (US$6.15 billion), with the stapled bonds.

She declined to name the banks.

The stapled bonds will be issued according to a new government
policy designed to help enable the recapitalized banks to sell
their bond portfolio at par.

Around 70 percent of the assets of the recapitalized banks are
still in the form of the government's recapitalization bonds, a
division that is considered unhealthy.

Miranda said the stapled bonds also were aimed at helping to
create an active secondary bond market.

She said this was in accordance with the government's plan to
issue treasury bills with a maturity of between six months and
one year.

But Miranda failed to provide additional details.

The stapled bonds consist of two types, with interest rates of
16.5 percent and 10 percent respectively.

The government earlier issued bonds with various maturity
periods and with fixed interest rates and variable interest rates
to recapitalize major private and state banks.

Under the new policy, the banks can only exchange the five-
year bonds which carry a 12 percent fixed interest rate with the
stapled bonds. They can exchange 30 percent of their five-year
bonds with the higher-yield bonds, and another 60 percent with
the lower-yield bonds.

This is meant to prevent adding to the burden of the state
budget in covering the interest cost of the government bonds.

The 2001 state budget beginning in January allocates Rp 53.46
trillion to cover the bonds' interest costs.

The government has issued more than Rp 412 trillion worth of
bonds to help recapitalize several domestic banks. The
recapitalized banks included the publicly listed Bank
Internasional Indonesia, Lippo Bank, Bank Universal, Bank
Danamon, Bank Central Asia, Bank Bali, Bank Niaga and state Bank
Negara Indonesia; and nonlisted Bank Bukopin, Bank Artha Media,
Bank Prima Express and Bank Patriot, and state Bank Mandiri, Bank
Rakyat Indonesia and Bank Tabungan Negara.

The government initially expected the banks to be able to sell
the bonds to investors to help them raise liquidity, but the
bonds have not proved attractive to investors partly because the
coupon rate is lower than the interest rate of the Bank Indonesia
SBI promissory notes.

The government launched the new policy to allow banks to sell
the bonds and raise liquidity, to allow them to resume lending to
the cash-strapped real sector.

The bonds with 16.5 percent yield will likely be more
attractive than the one-month SBI notes, which currently carry an
interest rate of 14.32 percent.

Corporate bonds currently pay interest of between 17.50
percent and 20 percent, but in terms of risk the stapled bonds,
being treasury bonds, are expected to have a competitive
advantage.

Bank Indonesia expects the banks that agreed to exchange part
of their recapitalized bonds to use the liquidity they will
obtain, estimated at around Rp 20 trillion, for lending in order
to improve their profitability. Lending rates currently run
between 18 percent and 20 percent. (rei)