Creditors face $180m loss after court ruling

Creditors face $180m loss after court ruling

Bloomberg, Jakarta

A group of foreign creditors who lent US$180 million to an Indonesian company for the construction of a Jakarta Stock Exchange building may lose the entire amount, under a decision by a Jakarta court on Tuesday.

Loans to PT Danareksa Jakarta International, an affiliate of the Indonesian state-controlled investment bank PT Danareksa, to build the exchange's second tower used illegal loan and security documents, Judge A.M.S. Bachtiar ruled in South Jakarta's district court.

This means the lenders -- including banks and debt funds from the U.S., Europe, and Asia -- may not be repaid, raising concerns about all similarly-structured loans to Indonesian companies, lawyers said.

"This is a revolutionary court ruling," said Feizal Syahmenan, a lawyer representing 33 creditors including the Singapore branch of Bank of Taiwan, and a distressed debt fund advised by Hudson Advisors Indonesia. With this ruling, "the court has invented a way for companies to borrow money and not repay."

He said creditors planned to appeal.

In the wake of the Asian financial crisis of 1997-1998, some of the world's biggest banks and bond investors have struggled to recover billions of dollars lent to scores of Indonesian companies such as Asia Pulp & Paper Co., which owes nearly $14 billion. Indonesia's legal system has proved a major obstacle in recovering funds, creditors and international agencies say.

"This is a lesson to foreign companies who always said they obey the law," said Hotman Paris Hutapea, an Indonesian lawyer representing Danareksa Jakarta International. "The judge said the loan documents and security documents were illegal."

Richard Smith, president director of Hudson Advisors Indonesia which advises a distressed-debt creditor, confirmed the decision and said his firm is waiting to see the court documents.

Hotman said the judge rejected Danareksa Jakarta International's claim for 1 trillion rupiah, or nearly $120 million, in damages.

The dispute between Danareksa Jakarta International and its creditors involves loans that were made for the construction of the stock exchange tower and to refinance existing debt. The stock exchange building houses the World Bank, units of ABN Amro Holding NV, accounting firm Ernst & Young, and other companies.

The loans were made using an offshore company, which lawyers and creditors say is a common practice. A British Virgin Islands- based company called Eastglobe Ltd. was set up to borrow the money in 1996 from a group of bank creditors led by Citicorp Investment Bank (Singapore) Ltd.

Danareksa Jakarta International last November asked an Indonesian court to cancel the $180 million debt, saying a financial adviser steered it into an illegal loan agreement: the company's move was intended to prevent creditors from taking over the company's fixed assets.

Lawyers who attended today's hearing said the judge declared the documents covering loans and security "null and void," saying that the structure of the loan did not meet Indonesian regulations.