Debt talks may ensnare Eurobonds

Debt talks may ensnare Eurobonds

HONG KONG (Dow Jones): Holders of Indonesian Eurobonds may
soon find themselves caught up in a new round of debt talks
between Indonesia and Paris Club creditors, analysts say.

Indonesian government officials this week said they may ask
Paris Club creditors to reschedule about US$2.6 billion to $2.7
billion in sovereign debts maturing between April 2000 and March
2001.

Indonesia's sovereign floating rate note due 2001 matures
during that period, and thus may be included in any Paris Club
restructuring agreement, says Ashok Bhatia, primary sovereign
analyst for Indonesia at Standard & Poor's in London.

That would follow the precedent set by Pakistan's $3.3 billion
Paris Club restructuring, which was agreed on condition that the
country approach its international bondholders for a similar
rescheduling arrangement. Traditionally, due to their wide
investor base, Eurobonds have been considered sacrosant and
excluded from such reschedulings.

But the Paris Club argued that private creditors should share
the burden of these sovereign reschedulings, in line with the new
"financial architecture" that is being put in place in the wake
of the Asian crisis.

Indonesia has one US$-denominated floating rate note due
February 2001, with an outstanding principal amount of US$26
million and rated triple-C-plus by Standard & Poor's.

"Unless the Paris Club were to make a very specific exemption
of Indonesia's FRN, recent precedents would suggest that it would
have to be rescheduled," says Bhatia.

Bhatia adds, however, that a rescheduling of Indonesia's FRN
would directly affect only a small group of long-term investors
who hold relatively small amount in outstanding debt. The country
also has a larger issue US$400 million Yankee bond due 2006,
which wouldn't be included in a restructuring deal for 2000/2001.

Even so, Indonesia is unlikely to be any more happy than
Pakistan with a demand by the Paris Club to restructure its
Eurobonds, says one fixed income analyst with a U.S. investment
house. With Eurobond investors also likely to be angered,
Indonesia would face a higher cost for future such international
borrowings.

"They (the Indonesian government) want to be able to go to the
market in the future. I don't think they would be in favor of
that," says the fixed income analyst.

Indonesian government officials contacted by Dow Jones
Newswires Thursday weren't able to comment on the FRN's possible
inclusion in a debt restructuring.

Even so, investors in general have been aware of the
possibility of further Indonesian rescheduling, and aren't likely
to flinch too much if the FRNs are included, says John Sevilla,
vice president for fixed income research at Salomon Smith Barney
in Hong Kong.

"The people who've been playing in Indonesia recently are
among the most battle hardened investors," Sevilla says, noting
that distressed and high-yield investors are heavily active in
Indonesia debt. "The people who look at Malaysian and Korean
bonds are not the ones looking at Indonesian loans."

Indeed, the debt rescheduling could be viewed as a plus for
the overall economy, helping to boost overall investor sentiment
toward the crisis-hit country, some analysts said.

"The impact of this kind of restructuring is it provides
balance of payments relief," says Sevilla. "To get debt relief is
a good thing for a country like Indonesia."

The spread on the benchmark sovereign bond due 2006 have been
mostly unchanged at around 575 basis points since a week ago.

Last week, the spread tightened below 600 basis points for the
first time since the May 1998 ouster of president Soeharto.

Though Indonesia's benchmark 2006 bond isn't likely to be
caught up in the next round of rescheduling, investors may have
to worry about its inclusion in some future debt restructuring,
warns the fixed income analyst.

And Bhatia said that the way Indonesia handles its debt
restructuring could impact on its sovereign ratings.

"To some extent this scenario has already been factored into
the ratings," said Bhatia. "It is one reason why Indonesia's
foreign currency ratings are not conceivably a little bit
higher."

But there might be further downside, depending on Indonesia's
course of action.

"If we believe Indonesia is going to default on a rated
obligation, we will make the requisite downward ratings
adjustments," he said.

The ratings analyst said investors should be careful in how
they read the agency's ratings actions. A downward ratings move
on Indonesia, if taken, would reflect the government's ability to
meet its debt obligations, rather than the country's economic
health.

"One could have a scenario where the Indonesian economy is
stabilizing and showing signs of promise, but nevertheless, one
of the legacies of the crisis is the ongoing debt restructuring,"
he said. "Our ratings are firstly and foremostly for commercial
creditors, be they banks or bondholders. They are not opinions on
economic well-being in the broadest sense."