Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Everybody seems to be betting big on Indonesia as the country of the future in Asia. Even as they do, some executives in Jakarta are returning to the past, using interpretations of the law to leave international bills unpaid.

Indonesia was the best performer among countries represented in an Asia dollar bond index from Merrill Lynch in the first quarter, and its equity market closed the period as the region's third-best gainer. Bond investors who stayed the course through volatility made a 7.6 percent return.

Rising Start
Indonesia's stock market is up 5.6 percent this year, the third-best performance in Asia
Source: Bloomberg

In the same quarter, however, companies dealt major blows to foreign creditors using tactics that might make an aggressive New York lawyer cringe. In January, advisers for the cellphone retailer PT Trikomsel managed to get a court decision that effectively dismissed any claims from foreign creditors, among them holders of S$215 million ($159 million) of notes sold in Singapore. On Friday, Reuters reported that a Jakarta judge excluded Standard Chartered from a creditor list and raised questions about the validity of the bank's claims to recoup a $1 billion loan made to tycoon Samin Tan's coal miner Borneo Lumbung Energi & Metal.

Sorry, Can't Pay You
Indonesian defaults on offshore debt have been accelerating
Source: Bloomberg

According to Debtwire, the strategy being used against Standard Chartered could be extended to other loans to miners, in the same way that Trikomsel's tactic has been used before against bondholders. In summary: Foreign money is welcome, but if borrowers have trouble paying, lenders have no right to sue. 

The Trikomsel strategy was first employed by Asia Pulp and Paper, which in 2001 recorded the biggest debt default in the region's history. APP's bonds were sold by an offshore special purpose vehicle, which extended the cash to the parent through an intercompany loan -- a common occurrence in Indonesia. When restructuring started, judges in Jakarta said the shell subsidiary lending the money had a vote on how creditors would be repaid, but those who bought the bonds from it didn't.  

Standard Chartered is being dogged by a requirement that mining companies, which are regulated by the government, request authorization before they do deals. Such regulatory blessing was ignored in good times. The rule has been recalled to suit borrowers struggling with payments. If other miners use the same tactic, Standard Chartered could be looking at much larger losses.

The bank won't be alone, however. From regional institutions such as Singapore's DBS to global powerhouses like Credit Suisse, lending to Indonesian resources companies used to be a great way to drive revenues. 

What's happening now is a reminder that while Indonesian law is as good as that in many Western countries, the legal environment and judges' interpretations don't always conform to what might be expected in New York, or even nearby in Singapore. As they ride the latest wave of optimism about the country, investors would do well to set aside some of their gains to ensure they have the best legal advice. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net