Government changes aid scheme to BII after complaints

Government changes aid scheme to BII after complaints

JAKARTA (JP): The government has decided to guarantee the Rp
12 trillion (US$1.2 billion) debt of the Sinar Mas Group to
publicly listed Bank Internasional Indonesia (BII), putting an
end to a much-criticized earlier plan to swap the debt with
government bonds.

Chairman of the Indonesian Bank Restructuring Agency (IBRA)
Edwin Gerungan said late on Monday that the measure would free
BII from the risk of its huge exposure to Sinar Mas.

"The government is committed to guaranteeing the debt of Sinar
Mas to BII," Edwin told a brief media conference.

He added that in return, the Sinar Mas founder, the Widjaja
family, would provide collateral plus a personal guarantee to the
government worth more than 145 percent of the group's debt to
BII.

He said that the measure was part of the investment management
performance agreement signed by the government, BII and Sinar Mas
in May 1999 prior to the bank's recapitalization.

He said that the complete details of the measure were still
being worked out.

The government initially planned to swap the Sinar Mas debt to
BII with government bonds in a bid to save the bank. But the
measure was strongly criticized as it would create a greater
burden on the already strained state budget.

The government has issued some Rp 430 trillion worth of bonds
to help finance the recapitalization of the country's ailing
banks, including BII. The state budget will cover the interest
rate of the bonds.

BII was founded by Sinar Mas, but after the government
recapitalization program, the government became the owner of a 57
percent stake in the bank. The group used the BII loan to finance
various projects.

Edwin said that guaranteeing the Sinar Mas debt was more
effective than swapping it with government bonds because with the
latter measure the bank would still suffer a "net open position".

"With the guarantee, the government will (take over) in case
Sinar Mas defaults on its debt to BII so that it will not affect
the bank's balance sheet," he said.

"We want to secure the bank (BII)," he added, arguing that
closing down the bank would cause the government to lose its Rp
6.5 trillion recapitalization investment in the bank plus the
cost of guaranteeing some Rp 27 trillion in deposits in the bank.

Edwin said that with the new measure, BII would have a capital
adequacy ratio (CAR) of more than 7 percent.

Under the earlier plan, BII would have had a CAR level of more
than 10 percent.

All domestic banks must have CAR level of at least 8 percent
by the end of this year or risk closure.

Edwin declined to clarify the status of the Sinar Mas debt to
BII, but Bank Indonesia director for banking supervision Siti
Fadjriah said last week that it was a performing loan.

Elsewhere, Edwin stressed that the government would not bail
out Sinar Mas' overseas debts.

The case of Sinar Mas debt to BII has also become a major
international issue, particularly as the group's New York-listed
Asia Pulp & Paper (APP) also owes more $10 billion in overseas
debt, of which about $2 billion is due this year.

Separately, Moody's Investors' Service said on Monday that it
had put BII under review for a possible downgrade, citing a $43
million payment default by its sister company PT Tjiwi Kimia, a
Jakarta-listed paper manufacturer.

"This payment default raises the possibility that other units
of Sinar Mas, to which BII has a very large exposure, may be
affected, with negative implications for the bank's asset
quality," Moody's said in a statement.

Tjiwi Kimia's $43 million loan fell due on Feb. 1.

Moody's said that the review would be on BII's long-term
deposits rating of Caa1 and its general financial strength rating
of E-plus, but would not affect its short-term deposits rating.

Despite having an attractive franchise, BII had "slowed down
its recovery process due to its unresolved outstanding loans to
these related parties within the Sinar Mas Group," Moody's said.

Moody's also confirmed that it had downgraded the rating of
Tjiwi Kimia to Ca, following the payment failure, and that of APP
and its other subsidiaries to Caa3 with a negative outlook.

Rival ratings agency Standard and Poor's on Friday downgraded
Tjiwi Kimia corporate and senior debt ratings to D from CCC.
Other APP group companies were downgraded to CCC minus from CCC.
(rei)