IBRA's asset securitization difficult: Experts

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.