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."