Govt readies $1 billion in bonds for BII loan transfer

Berni K. Moestafa, The Jakarta Post, Jakarta

The government plans raising hedge bonds worth US$1 billion for Bank Internasional Indonesia (BII) next week to replace bad loans owed by parent Sinar Mas Group, as part of Bank Mandiri's acquisition move on BII, a minister said on Friday.

State Minister of State Enterprises Laksamana Sukardi said the hedge bonds could be issued as soon as Monday.

"This (decision) has been made after consultation with the DPR (House of Representatives). I know it's late but we had to wait for things to get clear before the government could give its go ahead," Laksamana was quoted as saying by Detik.com online.

He was referring to the due diligence process on BII that must precede the loan transfer.

The bond issuance has been a sensitive issue as it seen as a further burden to taxpayers. The government has previously issued some Rp 430 trillion ($41 billion) worth of bonds to bail out ailing banks. The state budget covers the interest rate of the bonds.

In charge of taking over the Sinar Mas loans from BII's balance sheet, will be the Indonesian Bank Restructuring Agency (IBRA).

The loan transfer is a prerequisite for Bank Mandiri's acquisition of BII.

That follows concern that BII's capital adequacy ratio will plunge on the high possibility of the Sinar Mas loans turning bad.

Much of these loans are U.S. dollar denominated. Although the bonds replacing them are issued in rupiah rates, when hedged to the U.S. dollar their value should remain equal to the Sinar Mas loans.

Laksamana said the exact value of the hedge bonds in rupiah terms depended on the exchange rate.

"IBRA has prepared $1.059 billion plus Rp 5 trillion, so it could be around Rp 14 trillion," he said.

BII has exposure to the group of some 60 percent, which exceeds the 20 percent legal lending limit rule.

Almost all of the loans were channeled to Sinar Mas's unit, the Singapore-based Asia Pulp & Paper (APP).

APP earlier this year imposed a payment standstill on its debts worth some US$13 billion. This raises fear the company would skip payments to BII, thus impacting the bank's capital adequacy ratio, the ratio between capital and risk-weighted assets.

Transferring the Sinar Mas loans out of BII would clear its balance sheet from the nonperforming loans.

"I am quite optimistic that by raising the hedge bonds, BII will be able to improve its performance," Laksamana said.

He added the loan take over is also slated for next Monday.

In return, IBRA has asked Sinar Mas's owners, the Widjaya family, to surrender collateral at 145 percent of the group's debts to BII.

Upon the urging of legislators, IBRA also demanded that Sinar Mas founding father, Eka Tjipta Widjaya, surrender his personal collateral to the agency.

IBRA chairman I Putu Gede Ary Suta said the agency's lawyer and Eka's lawyer met on Friday but no deal had been reached.

"Basically, he (Eka) wants to pay and at this moment the discussion is ongoing. But the point is that he must pay," Ary Suta said.