Further delay of BCA sale unwarranted

Further delay of BCA sale unwarranted

Riyadi Suparno, The Jakarta Post, Jakarta

The sale of the government's controlling stake in Bank Central
Asia (BCA) has again hit a snag, with sudden opposition from
inside the Cabinet.

The opposition from State Minister of National Development
Planning Kwik Kian Gie comes as the sale process reaches its
final stage -- in selecting a winner from the four remaining
bidders.

Kwik rightly argued that the government was still bankrolling
BCA with around Rp 9 trillion (US$873 million) in interest
payments per annum, arising from the government's Rp 58.2
trillion recapitalization bonds injected into the bank.

Therefore, Kwik further contended that it would be a huge
mistake for the government to sell its 51 percent stake for about
Rp 5 trillion -- far from enough to cover the government's
obligation to pay bond interest to the bank for this year alone.

However, Kwik's opposition was too late and not wise.

Such an argument should have been submitted to the
International Monetary Fund a year ago, not at the end of the
bidding process.

The sale of BCA has been incorporated several times in the
government's letters of intent to the IMF.

Kwik, however, does not seem to be backing down.

His argument is that he wants to save as many cents as
possible from the government's Rp 648 trillion of bonds issued to
save most of the country's troubled banks.

Without serious efforts, Kwik predicts that the government
will potentially lose a staggering Rp 450 trillion. And that
includes potential losses from BCA.

However, Kwik's efforts to minimize the losses this time are
pursued in the wrong way.

Kwik's contention that the government would get only Rp 5
trillion for the Rp 58.2 trillion bonds injected into BCA is a
misplaced argument.

When the bonds were issued, BCA was in the red, and thus the
Rp 58.2 trillion bonds brought up BCA's equity and capital
adequacy ratio into the black.

Because of this bond injection, BCA equity rose to Rp 9.4
trillion as of the end of 2001. That is the book value buyers are
willing to pay, plus a premium, and not the value of the
government's bonds in BCA.

Meanwhile, the Rp 58.2 trillion in bonds issued by the
government for BCA were to cover both BCA's unpaid Bank Indonesia
liquidity support or BLBI (of around Rp 35 trillion) and the
bank's bad loans.

The government issued the bonds for BCA only after the Salim
Group, the former controlling shareholder of BCA, pledged to the
government assets totaling Rp 52 trillion to repay BLBI and cover
intra-group loans.

Therefore, the government got assets in exchange for the bonds
issued for BCA and other banks.

If only the government had the money in the first place to
recapitalize BCA, it would not be burdened with the bond and Rp 9
trillion per annum in interest payments to BCA.

Any buyer of BCA, if they have the choice, would not like to
see more than 50 percent of the bank's assets filled by papers,
which do not sell well in the market.

Kwik seems to have discounted this reality that the government
received assets supposedly worth at least Rp 52 trillion or the
same amount the Salim Group owed the government.

Later, after being verified independently, these pledged
assets -- currently managed by PT Holdiko Perkasa (a new company
established by the Indonesian Bank Restructuring Agency) --
turned out to be worth less than Rp 20 trillion. So it was the
government's mistake in the first place.

The first very mistake the government made was its decision to
accept assets to repay debt through the Master of Settlement and
Acquisition Agreement (MSAA). Secondly, it did not really verify
the assets being pledged by conglomerates. And thirdly, it still
entrusted the former owners to manage those assets.

Should all these mistakes be transferred into the new buyer of
BCA by withdrawing the government's recapitalization bonds or
exchanging the bonds with goodwill? It would be very unfair for
the buyer, and the buyer would surely not accept it.

So, who must cover the losses from the recapitalization of
BCA? As a consequence of the MSAA with Salim, the government
could only ask for more assets to cover the "misrepresentation"
which would range from Rp 2 trillion to Rp 4 trillion. Thus, it
must be the government -- the taxpayers -- which will in the end
cover the losses.

Considering all the past mistakes the government has made,
what the government and also all parties concerned could do now
is minimize the losses by obtaining the maximum price for BCA
shares, getting the highest recovery rate of assets under Holdiko
and of BCA's non-performing loans taken over by the Indonesian
Bank Restructuring Agency (IBRA).

Some experts calculate that acceptable rates of non-performing
loan recovery is around 20 percent, with Holdiko's assets
recovery at 40 percent.

Here Kwik is expected to play his role so that the government,
in this case IBRA, could get a higher rate of recovery for assets
and loans.

What about the best price for BCA shares?

Banking analyst Mirza Adityaswara from the Business Reform and
Reconstruction Corp. has the formula. He uses price to deposit
ratio to calculate the price of BCA shares, considering that the
bank has strong deposit franchise value.

Using bank acquisitions in Thailand in the period of 1998
through 2000 as comparison, Mirza contended that Thai banks were
acquired at 15 percent to 20 percent of the price to deposit
ratio.

At Rp 1,700 per share, BCA is trading on an 11 percent price
to deposit ratio. Hence, there is the possibility that the
acquisition price may go above Rp 2,000 per share, even above Rp
2,500 per share because bidders must add the controlling premium.

If the government gets Rp 2,500 per share for BCA, a 40
percent rate of the assets held by Holdiko and a 20 percent
recovery rate for the BCA non-performing loans, then the total
recovery rate for BCA would be 56 percent.

However, will the government get Rp 2,500 per share for its
controlling stake in BCA? Very unlikely. Bids from the two most
talked-about bidders for BCA shares -- Standard Chartered
consortium and Farallon Capital consortium -- reportedly are at
Rp 1,780 and Rp 1,775 respectively.

If that is the case, then, Kwik should again play his role to
get the best price for BCA. At least then he would have a strong
reason to demand a further delay in the BCA sale.

To do this, Kwik better coordinate with his colleagues in the
Cabinet so that any effort to get the best price for BCA would
not spoil the entire process and sacrifice other important
things, such as the target to get the best financial institution
to take over BCA.