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)