Mandiri may use recapitalization bonds for BII buy

Mandiri may use recapitalization bonds for BII buy

JAKARTA (JP): State Bank Mandiri said on Friday it planned
using its recapitalization bonds to finance the acquisition of
publicly listed PT Bank Internasional Indonesia (BII), amid
difficulties to raise revenue.

Bank Mandiri president E.C.W. Neloe said the bank had proposed
the plan to the government.

"There haven't been any decisions yet, but we have stated that
we want to pay (for the acquisition) with the recapitalization
bonds," Neloe told reporters, following a signing ceremony of
MoUs to extend loans for shrimp farmers.

Bank Mandiri plans to provide an estimated Rp 60 billion
(about US$6 million) in commercial loans to shrimp farmers.

Neloe said in financing BII's purchase, Bank Mandiri would pay
the bonds to the Indonesian Bank Restructuring Agency (IBRA),
which owns a 56.7 percent stake in BII.

He declined to explain the plan in more detail, saying he was
still awaiting BII's due diligence for the details to become
available.

Earlier this month, Bank Mandiri announced plans to acquire
BII as part of a plan to boost the bank's retail market segment.

Under the plan, BII would hold the right to accommodate Bank
Mandiri's entrance and turn the former into a subsidiary of Bank
Mandiri.

So far, no estimation has been made over the value of the
acquisition.

Neloe said the amount of bonds required to finance the
acquisition remains unknown, until after BII's due diligence.

According to him, the due diligence may take about two months,
after which he expected to finalize the acquisition by September
at the latest.

Many believe the acquisition is aimed at saving BII from
closure, on threats that its non-performing loans would become
unmanageable.

Most of these loans have been extended to the affiliated Sinar
Mas Group, the bank's former majority owner. At $1.2 billion the
loans account for about half of BII's credit portfolio.

As part of the acquisition deal, the government has agreed to
extract the loans from BII's balance sheet.

Commenting on Bank Mandiri's earnings, Neloe said Bank
Indonesia certificate rates of over 17 percent made it difficult
for them to raise earnings.

According to him, half of Bank Mandiri's recapitalization
bonds carry fixed coupon rates.

Once SBI rates hover above the coupon's fixed rates, a bank
becomes exposed to negative spread. This occurs when the bank
cannot cover the cost of its deposit interest rates with earnings
it made from the rates on loans or bonds.

Fixed-rate bonds carry a coupon rate of 12 percent or 14
percent.

Neloe said to raise revenue, the bank tried to recover some Rp
22 trillion in written-off bad loans, which it inherited from its
four founding banks.

Bank Mandiri was founded in 1999 from the merger of four state
banks.

"Of the Rp 22 trillion, Rp 1.2 trillion had been recovered by
July; our target for the end of this year is Rp 2.5 trillion" he
said.

Neloe said the recovery of bad loans had dropped Bank
Mandiri's nonperforming loan (NPL) ratio to some 16 to 17 percent
as against 27 percent last year.

He said the bank was targeting an NPL ratio of 3.5 percent by
the end of this year.

"But achieving that target looks difficult, it's more likely
that we'll end up with 5 percent," he added.

He also hoped to channel Rp 15 trillion in loans this year, of
which half would consist of new loans and the remainder from IBRA
under a deal to swap bonds with loans.

"Our new loans have already reached some Rp 8 trillion, but on
the other side, the IBRA's bond swap doesn't work," he said.

Under the bond swap proposal, he said, Bank Mandiri would swap
its recapitalization bonds with restructured loans from IBRA.

He said Bank Mandiri had asked for the transfer of Rp 1.5
trillion in IBRA loans in exchange for the bonds.

"It (the bonds swap proposal) was approved by the Financial
Sector Policy Committee (FSPC), but so far, there has been no
implementation," Neloe said.

He said that his bank has currently refrained from aggressive
lending, given the still unfavorable business climate and the
high lending rates that made investment expensive.

"In these times being aggressive is too risky, we might get
caught in more bad loans," he said. (bkm)