RI's mounting bad loans attract investors

RI's mounting bad loans attract investors

By Berni K. Moestafa

JAKARTA (JP): With bad loans amounting to billions of U.S.
dollars, Indonesia's debt market has attracted investors who
specialize in buying the debts of companies in financial
difficulty.

Called distressed debt investors, they are used to working in
economies that have a high level of risk but also offer high
yields.

They hunt debts, equity and other financial instruments of
distressed firms in the emerging markets of Africa, Asia, Eastern
Europe and South America.

But distressed debt investors have only recently entered
Indonesia.

"Indonesia is probably the most exciting new field of
opportunity for them (distressed debt investors). Many of them
believe that the economic and political situation has declined so
much recently that it is now an interesting arena for investing
in distress," Exotix managing director Peter J. Bartlett said.

Bartlett said that distressed debt investors started eying
Indonesia after the economies of Russia and certain South
American countries rebounded in 1999.

While distressed debt investors have existed in emerging
markets for about five to 10 years, in Indonesia their presence
is only about six months to a year old, he said.

"The perception of many international banks, especially in
Japan and Korea, that Indonesia is unlikely to recover in the
near future and their high levels of exposure mean that they have
been regular sellers of debt at significant discounts which
appeals to our clients," he explained.

According to him, distressed debt investors expected a 10
percent to 30 percent return on their investment over a period of
six months to two years.

Although he acknowledged that his clients were "nearly
virgins" when it came to the Indonesian economy, Bartlett said
that they were encouraged by the possibility of a medium-term
recovery.

"The economy of Indonesia has been extremely resilient
considering the country's volatile political background,
underdeveloped legal system and the damage done by pervasive
corruption," he said.

However, Bartlett added that distressed investment had less to
do with speculation than with the ability to undertake strong
analysis.

"Their (distressed debt investors) investments are made on
solid investment decisions based on the fact that the sellers of
the debts were unwise to have lent to the companies in the first
place," he said.

According to him, the original lenders who decided to sell the
assets had done a poor job in assessing the companies' abilities
to repay.

Responding to the interest of distressed debt investors in
Indonesia, the Hong Kong-based investment firm Asia Debt
Management Hong Kong Limited (ADM) seized the opportunity and
established a fund for the local market.

The firm joined the local investment firm PT Bhakti Investama
to form the Indonesian Recovery Fund Limited in May 1999.

ADM director Justin Ferrier said that investors were comparing
Indonesia with other countries in Asia but that the country was
of particular interest to distressed debt investors for a number
of reasons.

One of which, was the large amount of distressed assets that
are available for sale, according to him.

"In Indonesia recently, there appears to be more willingness
for creditors and shareholders to restructure companies and get
companies back on their feet," he said.

Robert Appleby also director at IRCL, said that lenders and
shareholders have only recently become more flexible in their
debt restructuring.

"All the banks wanted their money back, plus interest, plus
interest on interest, it just wasn't going to happen," he
explained.

Later creditors and debtors began to realize that
restructuring debts was heavily time and energy consuming, he
continued.

But when creditors saw little hope of their loans being
returned, distressed debt investors offered to buy the loans at a
discounted rate.

"What most investors fail to see, are the opportunities that
lie in distressed companies," Appleby said.

He said that investors could earn a hefty margin on distressed
debts, once companies recover or pay their debts in full.

In Indonesia, he said, the single most important pool of
distressed assets was the Indonesian Bank Restructuring Agency
(IBRA).

IBRA, an arm of the finance ministry, has taken on bad loans
amounting to over Rp 100 trillion (US$11 billion) from the
country's state banks as part of the government's program to
clean up the messy banking sector.

In addition, the agency has also taken over assets worth about
Rp 600 trillion from ex-owners of closed and nationalized banks
as collateral for their huge debts to the government.

IBRA's asset disposal head Dasa Sutantio said that he expected
plenty of debt restructuring deals in the remaining four months
of this year.

To meet its sales target of Rp 18.9 trillion this year, he
said that IBRA must sell another Rp 6 trillion in assets, of
which half would come from the sale of loans.

However, he said he would rather avoid selling loans to
distressed debt investors because of their unattractive offers.

At present, he went on, they made up only a small percentage
of IBRA's total sales portfolio.

"There is no standard here, their highest bid (discount rates)
can reach 95 US cents to the dollar to as low as 5 cents to the
dollar," Dasa said.

Meanwhile, researcher Martin Pangabean at state-owned Bank
Mandiri estimated that distressed debt investors played only a
minor role in buying local assets.

"There have barely been any transactions, and if so, they have
usually involved minor deals," Martin said.

He said that despite the high interest showed by distressed
debt investors, most owners refuse to sell.

"These foreign investors sometimes go too far, they value
assets way too low. It's only reasonable that owners refuse to
sell," Martin explained.

"They probably buy cheap so that they can sell (equity) once
an opportunity arises," he said.

However, as Indonesia continued to give mixed signals on its
economic recovery, the country has a limited number of investors
to chose from.