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.