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.