Indonesian debtors sue lenders for stress over loans

Indonesian debtors sue lenders for stress over loans

Bloomberg, Jakarta

Asia Pulp & Paper Co., PT Danareksa Jakarta International Ltd. and other Indonesian borrowers, more than US$14 billion in arrears, are suing lenders for "emotional distress" and other complaints caused by creditors' efforts to get their money back.

A unit of Asia Pulp is suing U.S. hedge fund Oaktree Capital Management LLC and 13 other companies for more than $850 million for damages and to recover payments. In August, Property investor Danareksa Jakarta International, whose tenants include the World Bank, won a suit to have $180 million in loans declared invalid.

Investors are concerned the court cases may encourage other Indonesian debtors to try to annul their debts, which the government puts at more than $60 billion. It also spells a warning to banks and investors as companies such as PT Bank Mandiri lead a return to the debt markets this year.

"There are wider implications," said Linda Widyati, a lawyer representing Hudson Advisors Indonesia, which manages investments in Indonesian debt made by Dallas-based Lone Star Funds. "It's scary for investors who come to Indonesia and buy Indonesian bonds and debt."

Banks and investors that have waited as long as four years to be repaid say the growing number of court cases from Indonesian debtors may further deter investment in Southeast Asia's biggest economy. Approved foreign direct investments slumped one third in 2002 to a nine-year low of $9.7 billion.

"With this kind of option available, why would anyone repay their loans in Indonesia?" Melissa Obegi, legal counsel for Oaktree, said in an e-mail.

Hotman Paris Hutapea, an Indonesian lawyer representing PT Indah Kiat Pulp & Paper, the Asia Pulp unit, says the legal action is partly directed at hedge funds and distressed-debt investors that buy bonds and bank loans at a fraction of the debt's face value after companies have defaulted.

The Indah Kiat lawsuit includes a claim for $350 million in damages because creditors named "were never willing to negotiate in the restructuring" and because they took legal action against Asia Pulp to recover their money, Hotman said.

"They are very greedy investors," Hotman said in a telephone interview. "We only sue the ones who sue us. If an enemy comes to my home, I have to fight. Either him or me is dead or alive."

Danareksa Jakarta, which borrowed $180 million from Asian banks including Bank of Taiwan for the construction of the skyscrapers that house the Jakarta Stock Exchange, claims its loan and security documents were illegal and is seeking Rp 1 trillion ($117 million) in damages from creditors.

In August, a Jakarta court ruled the loan was illegal. Creditors including Lone Star are appealing the judgment. Danareksa Jakarta is 45 percent owned by state-controlled investment bank PT Danareksa.

PT Tri Polyta Indonesia, a Jakarta-based plastics maker previously controlled by Bambang Trihatmodjo, one of former President Suharto's sons, asked an Indonesian provincial court earlier this year to invalidate $185 million of international bonds. The company sold the bonds seven years ago and has not paid interest on its debt since 1999.

According to court filings, Tri Polyta is claiming at least $600 million in damages, including $500 million for the "emotional distress" of its management and $100 million for lost business arising from bondholders' attempts to recover the money.

The lawsuits have not deterred investors from buying new Indonesian bonds, which offer attractive interest rates.

Bank Mandiri, Indonesia's biggest bank, sold $300 million of bonds in April when they yielded 7.125 percent or 4.25 percentage points more than U.S. Treasuries of a comparable maturity. PT Indofood Sukses Makmur, the world's biggest maker of instant noodles, raised $280 million in June 2002, selling five- year bonds paying annual interest of 10.375 percent.

The consequences would be huge for the government, the economy, if these companies were to default for strategic reasons rather than because the economy had gone to pieces," said James Blair, who helps oversee $1 billion of bonds, including Bank Mandiri's, from Asia excluding Japan and Australia at Aberdeen Asset Management Ltd. in Singapore. "This is the quality end of the spectrum."

Oaktree said Asia Pulp, or APP, has never disputed the fact that it owes money to its creditors. Oaktree and Gramercy said funds they manage obtained a temporary restraining order in New York on Nov. 25 to stop Asia Pulp and Indah Kiat from pursuing their lawsuit in Indonesia.

"Not once during the course of the New York litigation on repayment of the same bonds did APP even dispute that it owed full repayment on the bonds, let alone raise the defense that the bonds were illegal," Obegi said in an e-mail. "No law firm here would dare to raise such a frivolous defense."

Asia Pulp, which defaulted in March 2001, is trying to persuade creditors who lent money to its Indonesian operations to agree to a restructuring plan that allows the company to pay back its debt over as long as 22 years.

Several creditors, including Gramercy Advisors LLC, Oaktree and the Export-Import Bank of the United States, said the terms were unacceptable and started legal proceedings in New York and Indonesia against the group in a bid to foreclose on Asia Pulp's secured assets.

Indah Kiat's lawyer Hotman said the creditors are being sued because they "purposely tried to ruin the negotiations," led by the Indonesian Bank Restructuring Agency, between Asia Pulp and various creditors of its Indonesian operations.

"They are newcomers who buy the debt very cheap and put a gun to the head of my client. They just came in after Asia Pulp stopped paying -- they hit and run," Hotman said.

"Foreigners always think about 'what are my rights?' We Asians are totally different," he said. "Some foreigners have the wrong approach. They are greedy investors who buy these bonds."

In a letter to officials at the State, Treasury and Commerce departments in the U.S. dated Sept. 4, Oaktree urged the U.S. government to help put a stop to some of Indonesia's practices, including "the abuse of the legal system by Indonesian borrowers seeking to avoid their contractual obligations."

That "APP would launch this kind of absurd attack on its creditors demonstrates the extent to which this tactic has become the blueprint in Indonesia for how to deal with foreign creditors," Obegi said. "Get a judge to declare that the loan was illegal and seek damages for all the emotional distress inflicted by the loan."