Foreign investors resist Indonesian temptation

Foreign investors resist Indonesian temptation

HONG KONG (Reuters): Indonesia's Bank Restructuring Agency (IBRA) wants to clean up the country's biggest financial messes this year, but success hinges on finding a way to tempt back badly burned and deeply skeptical foreign investors.

Unattractive rates of return, concern about behind-the-scenes influence of disgraced tycoons and a perceived prejudice against foreigners are powerful antidotes to the allure of inherent value that Indonesian assets hold for overseas investors.

But bankers say they may be enticed if asset prices are cut further and investors focus on the potential of key industries.

"The trick is to make sure you're buying the future, not the past," Vincent Fan, chief executive of private equity fund manager CVC Asia Pacific Ltd, told Reuters.

"But fund raising is a difficult prospect. Lenders aren't prepared to go back," said Fan, who manages US$750 million, none of which he spent in Indonesia last year, preferring South Korea.

IBRA managed to beat its $2 billion asset sales target in 2000 with a cocktail of solutions shifting everything from equity in firms across Indonesia's economic spectrum, to part of a $30 billion mountain of mainly dollar-denominated distressed debt.

But despite acknowledging IBRA is doing its best in tough circumstances, the country's volatile political risk and corruption-tainted record keep overseas investors away.

Indonesia came bottom of the league for new international syndicated loan financing for the second year running in 2000, securing just $1 billion of the $187 billion issued last year in the Asia Pacific, according to Reuters' Loan Pricing Corp unit.

Mainly to blame is huge Indonesian exposures banks retain, against which they provision up to 80 percent of the value of fresh loans rates of return on which are not that attractive.

Two refinancings last year -- for Indofood and Indah Kiat -- earned investors about 300 and 475 basis points (bps) respectively over the London Interbank Offered Rate (LIBOR).

"Take that in relative value terms and compare it to bond spreads for Indonesia and it's not sufficient," said Tong-Poh Tay, managing director of Asia Pacific global syndicated finance at JP Morgan in Hong Kong.

Indonesia's sovereign bond due in 2006 was quoted at about 690 bps over LIBOR's 548 bps level on Friday. Investors could easily double that for taking a risk on corporate bonds.

Potential

Loans do offer some potential though for banks which have written down portfolio values since the financial crisis struck.

"If they sell for 40 cents on the dollar it's better than the 25 cents they're marked at in the book. You'll actually write a bit of profit," said David Matthews, Barclays Capital Asia global loans director, once a lender to the debt-ridden power sector.

The potential in restructured assets is Indonesia's allure.

"But if you're looking at restructuring stories, you want to be in distressed debt, not distressed equity which can be worth zip. With debt you're higher up the food chain," said James Squire, director of Asian equities at Baring Asset Management.

International equity liquidity in Indonesia is so marginal that it accounts for just one percent of benchmark weightings in the region and most fund managers are underweight even that level.

Fixed income investors though say Indonesia's debt story -- especially distressed paper -- is better than Thailand or Korea.

"In Indonesia you've got a lot of companies with a lot of debt, almost all of which is in dollars, and that makes for a potentially more interesting market for foreigners who don't want to take the currency risk," David Boren, global strategist at London-based emerging markets fund manager, Montpelier.

IBRA says its total loan portfolio is about $30 billion dollars, and says some 68 percent of it has been restructured.

HSBC Bank forecasts Indonesia's external obligations to be 111 percent of gross domestic product in 2001, four times that of Korea. Debt servicing costs relative to exports are seen at twice that of the Philippines, Asia's second most indebted country.

Montpelier manages $250 million of global emerging market debt and holds more than half its Asian Debt Fund in Indonesia which had returned investors 24.2 percent on a one year basis as at the end of November 2000, the latest figures available.

Transition credits -- defaulted bonds restructured into performing assets -- could be the way mainstream investors come back to Indonesia because rehabilitated bonds are standalone paper without the complications of the distressed debt.

Satellite communications company Satelindo already has a $215 million restructured promissory note transition credit in the market and could be joined by PT Indocement and independent power producer, PT Paiton Energy later this year, market sources say.

Montpelier's Boren is bullish on restructured bank debt, seeing a trade-off between state-guaranteed bank recapitalization bonds, flush bank liquidity and tighter sovereign spreads.

The finance sector -- particularly consumer finance -- is also attractive to Ascanio Martinotti, a managing director of JP Morgan Partners, the bank's private equity arm.

Consumer spending is a huge driver of the Indonesian economy, generating about 73 percent of GDP according to third quarter 2000 data, versus a global average of about 60 percent.

"If you insulate yourself from corruption risk, if you keep an eye on your costs, set up a good distribution network, are in the right sector like the consumer sector and you manage your business properly, you make a lot of money," Martinotti said.

But Martinotti, an investor in Indonesia since 1993 who travels there weekly to scout out deals, has yet to make money from IBRA sales which he says favor local, not foreign buyers.

He has competed in two IBRA auctions with Chase Manhattan Bank -- which bought JP Morgan last year -- but says while IBRA is staffed with Indonesia's best brains, political pressure stops asset sales at terms overseas investors are willing to accept.

Investors also perceive reluctance among IBRA executives to restructure too vigorously as once IBRA's work is done, they will have to seek jobs with firms and tycoons they have been tough on.

While supportive of efforts to rebuild the economy on a more solid foundation, Martinotti sees most restructuring done outside the IBRA process, which is where he concentrates his deal making.

"If there's any restructuring it's happening in the private sector, driven by market forces and that has been happening. On that type of restructuring, I'm quite optimistic. I might be a lonely voice, but things are not as bad as they look," he said.