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.