IBRA's asset securitization difficult: Experts

Berni K. Moestafa, The Jakarta Post, Jakarta

Issuing commercial papers using assets of the Indonesian Bank Restructuring Agency (IBRA) may sound promising, but doubts over asset quality and market demand undermine the effectiveness of the securitization plan, according to analysts.

"If IBRA can pull this off, it (securitization) will unlock its assets," fixed income expert Khalil Rowter said over the weekend.

IBRA took over some Rp 430 trillion (about US$43 billion) worth of loans from local banks in return for the government recapitalizing them with bonds. The loan assets are now being sold to help the cash-strapped government plug a chronic state budget deficit.

But IBRA asset sales have been progressing slowly, bogged down in part by a sluggish economy that has dampened investors' interest and impeded efforts to restructure the loans.

Although not much is known about the securitization plan, a government official said it would speed up asset sales.

IBRA, through a third institution, can raise cash by issuing commercial papers, and pay for them with interest rate payments from the loans it owns. In case of a default, investors can seize debtors assets that came attached as collateral for the loans.

Khalil called this collateralized debt obligation (CDO), which he said was quite common in housing loans in the U.S.

This scheme was promising for a number of reasons, he said.

Packaging the loans into commercial papers allows investors to trade on them, and thus stay more liquid.

"Commercial papers are tradable, they could be floating rate notes, promissory notes or bonds," Khalil explained.

Holding commercial papers was also more convenient. He said investors would not need to deal directly with the debtors. They could skip the due diligence as that task would fall on IBRA.

In line with the different risks that loans had, Khalil estimated the commercial papers would come in two categories.

He described the two as junior and senior categories, with the former carrying a greater discount rate but at a higher default risk.

And Khalil said discounts would remain part of any securitization deal of IBRA assets.

Discounts have posed a major cut in IBRA's rate of return, amounting to over 70 percent for unrestructured loans.

Analysts blame this on the massive non-performing loans that have remain stuck in IBRA since they were taken over from local banks during the financial crisis in the late 90s.

Interest payments from these loans have stopped, which makes it tough for IBRA to get a good price on them.

Khalil said IBRA would need to continue to offer a juicy discount rate up-front, as room for raising interest rates was limited.

IBRA could not afford to offer rates beyond debtors' payment capabilities, although the rates should be attractive, he added.

Good IBRA assets were few, and so were the number of investors who would want to buy the securitized ones, he said.

Securitizing the assets, he said, would shut out banks which have been the traditional buyers of IBRA's assets loans.

"We're talking here about investors purchasing commercial papers, and there are only a few big ones," he explained.

The debt market is crowded with corporate bonds competing against government bonds, although trading in the latter was thin.

Banking analyst Ryan Kiryanto of Bank Negara Indonesia (BNI) said the government might prefer issuing notes over bonds.

"People are allergic to new bonds, this has the potential of inviting resistance from legislators," he said.

Although securitization would not add burden to the state budget, the public opinion of bonds has turned sour.

This year, the government must spend some Rp 58 trillion to serve interest rates on bonds that were issued to recapitalized ailing banks during the financial crisis.

That amount tops development spending, which has been set for Rp 52 trillion this year.

The securitization plan has yet to be approved by the Financial Sector Policy Committee (FSPC), which handles IBRA's debt restructuring deals worth over Rp 1 trillion.

FSPC secretary Syafruddin Temenggung said the plan was not open for public discussion until the FSPC approved it.