Recapitalization agreement signed

Recapitalization agreement signed

JAKARTA (JP): The government will issue bonds in two weeks to
raise funds to recapitalize nine private banks, a process which
will cost a total of some Rp 21.3 trillion (US$2.5 billion).

Minister of Finance Bambang Subianto and Bank Indonesia
Governor Sjahril Sabirin signed on Thursday the recapitalization
agreement with the owners and management of the nine banks.

Bambang declined to give the terms or structure of the bonds
because they are currently being completed.

"The (bond) design is still in progress," he said at the
signing ceremony.

However, Bank Indonesia director Subarjo Joyosumarto, the
architect of the government's bank recapitalization program, said
the bonds would carry a 3 percent fixed interest rate and a
floating rate according to the interest rate of the central
bank's three-month SBI promissory note.

"We are still in the process of structuring the bonds but the
interest rate structure will likely be a combination of a fixed
rate and a market rate," he said after the signing ceremony.

The recapitalization program is meant to boost the banks'
capital adequacy ratio (CAR) to a minimum of 4 percent.

CAR is the ratio between equity capital and risk-weighted
assets.

Banks eligible to join the recapitalization program are those
with CARs between minus 25 percent and less than 4 percent.

The government will provide up to 80 percent of the required
recapitalization funding by issuing bonds, while the remaining 20
percent of funding will be provided by the banks' owners in cash.

Subarjo said the 3 percent fixed interest rate on the bonds
would be applied until the banks' negative CARs were boosted to
zero, while the market interest rate would then be applied until
the CAR levels reached 4 percent.

When asked to confirm the fixed interest rate, Subarjo said:
"Yes, it's only 3 percent."

According to an official at the Indonesian Bank Restructuring
Agency, however, the fixed rate would be 3 percent above the
year-on-year consumer price index.

The bonds' floating interest rate will be much higher than the
government's initial interest rate target of below 20 percent.

The interest rate of the central bank's three-month SBI
promissory note was 35.59 percent at Wednesday's weekly auction.

"We decided to lift the rate because a 20 percent interest
rate would not be attractive for investors," Subarjo said.

Subarjo also said the signing of the recapitalization
agreement would pave the way for foreign investors to participate
in the bank recapitalization program.

"There are many foreign investors who are shopping around.
They told me that they would only enter once everything is clear
and the recapitalization agreement had been signed," he said.

He said foreign companies, including GE Capital, Standard
Chartered and Rabo Bank, were among those which had expressed
interest in investing in the nine banks in the recapitalization
program.

He said the owners of the nine private banks would inject
their 20 percent of recapitalization funding in one week, while
the government would issue the bonds in two weeks.

Subarjo said the nine private banks would need some Rp 21.3
trillion in recapitalization funding according to December 1998
due diligence audits.

He said any additional funding requirements resulting from the
possible further deterioration of the banks' capital between
January and April due to negative interest rate spread would be
shared by the banks' owners and the government. The government
would provide 80 percent of any possible additional required
funding while the banks' owners would provide 20 percent.

The nine banks in the recapitalization program are publicly
listed Bank Internasional Indonesia, Bank Lippo, Bank Niaga, Bank
Bali and Bank Universal, and non-listed Bank Bukopin, Bank Artha
Media, Bank Prima Express and Bank Patriot.

Subarjo said the listed banks would launch rights issues to
raise funds for recapitalization following the signing of the
recapitalization agreement.

Included in the agreement are stipulations on investment and
performance.

The first relates to a funding agreement in which the
government agrees to provide up to 80 percent of the required
recapitalization funding, with the remainder to be provided by
the banks in cash.

The second agreement relates to various targets the banks must
meet, including the requirement to eventually reach a minimum CAR
level of 8 percent, to lower intergroup lending to the legal
limit within a year and to resolve bad assets within three years.

Indonesian banks have been battered by the current economic
crisis, prompting the government to close 61 private banks since
November 1997 in a bid to clean up and restructure the industry,
which is seen as key to economic recovery. (rei)