Chandra Asri's debt workout

Chandra Asri's debt workout

After more than 18 months of negotiations, including vigorous
political lobbying by the Japanese government, and at least four
controversial preliminary agreements, the Indonesian Bank
Restructuring Agency (IBRA) finally decided on a take-it-or
leave-it restructuring scheme for more than US$1.1 billion in
debts owed by PT Chandra Asri petrochemical company to domestic
and foreign creditors.

The ministerial Financial Sector Policy Committee, IBRA's
governing board, announced on Monday it had finalized a debt
workout program which would reschedule Chandra Asri's $700
million in foreign debts to Japanese creditors led by Marubeni
Corp. to 15 years with interest pegged at 1.5 percentage points
above the one year American dollar London interbank offered rate
(Libor). If Marubeni disagrees with the terms of the scheme, the
committee will order IBRA to resolve the debt through a legal
process. Marubeni has yet to decide on the government-proposed
workout.

The final plan differs significantly from the preliminary
agreement signed by President Abdurrahman Wahid early last May
which was sharply criticized by the International Monetary Fund,
economists and the House of Representatives as being too much in
favor of Marubeni.

Under this scheme, Marubeni would convert $100 million of the
foreign debts into a 20 percent equity in the company with the
remaining 80 percent to be held by IBRA (Indonesian government).
The remaining $600 million debt would be rescheduled to nine
years with an annual interest floating at 2.5 percentage points
above Libor.

IBRA did not provide details about the final scheme it
submitted to Marubeni last week, especially regarding the
government's demand that Marubeni take a larger equity stake in
the olefins industry. However, the government seemed to have been
persistent in turning down Marubeni's demand that it become the
sole creditor to Chandra Asri.

Fearing that such a position could put the Japanese
conglomerate in a strong position to file a bankruptcy suit
against the petrochemical company, the final scheme proposes the
government as a creditor with a $50 million exposure. This means
that the government, which had taken over more than $400 million
in Chandra Asri debts to local banks and converted them into an
80 percent equity holding, would finally end up with a smaller
equity stake than the original plan. Marubeni would emerge with a
shareholding larger than the 20 percent, as agreed in the June,
2000 memorandum of understanding.

Marubeni would be well advised to take the government proposal
very seriously as the other option -- a bankruptcy proceeding
would be quite messy and inflict big losses to both investors and
creditors as only a tiny fraction of the liquidated asset could
eventually be recovered.

If the Japanese company is really confident about the
commercial feasibility of the petrochemical industry, it would
not be a major problem for it to raise its equity holding to more
than 20 percent.

After all, it was Marubeni itself which procured the machinery
for the petrochemical project in early 1990s, built the whole
plant and even supplied its raw materials. Refusing to take a
bigger equity on grounds that Marubeni is itself facing financial
problems would only validate the allegations rife in the 1990s
that the cost of the project had been highly inflated, thereby
making it less competitive on the international market.

Marubeni should realize that the $1.7 billion olefins project
in West Java had been a big controversy since its construction in
1991 due to the numerous forms of preferential treatment it got
from the then Soeharto administration. The project was exempted
from the foreign borrowing ceiling, which was introduced in late
1991 at the request of the World Bank due to Indonesia's
worsening balance of payments position. This was only due to the
fact it was sponsored by Soeharto's second son Bambang
Trihatmodjo and his business associates, notably Prajogo
Pangestu. And yet, despite this controversy, Marubeni made the
plunge at that time.

The government has shown good faith in trying to bail out the
project even though Chandra Asri had been notoriously known as
the icon of collusion and nepotism practices under the Soeharto
regime, getting preferential treatment from state banks and
tariff protection for its products.

Maintaining Chandra Asri as an on-going concern is the best
solution for both investors and creditors because olefins are
upstream chemicals Indonesia badly needs to develop its
manufacturing industry. As the only integrated petrochemical
industry already in operation in the country, Chandra Asri is in
a greatly advantageous position to reap the benefits when the
economy recovers strongly.