Getting Out From Under In Indonesia

Ad hoc deals may win Indonesia's key players much-needed debt relief

Rini Soewandi, chief executive of Indonesian auto assembler Astra International, will never forget the day she launched her effort to rescue the conglomerate. Before meeting with creditors in late October, the slightly built Soewandi said to her board of directors: "Just pray nobody throws an ax at me." Then she flew to Singapore to see executives from 10 Japanese banks that had lent Astra $1.4 billion. As the Japanese sat stone-faced, she told them bluntly that Astra would not pay them a penny for 13 months. The Japanese knew they were cornered. Seizing Astra was not an option: The local courts favored debtors, not creditors. Even if they succeeded, selling Astra would only fetch a fraction of what they were owed.

Soewandi's tough talk paid off. On Jan. 14, Astra's creditors agreed in principle to a complex deal granting Astra what amounts to a moratorium on interest and principal payments for this year. Astra's victory is not an isolated one. In the absence of a sound legal structure and a credible bankruptcy system, Indonesia's debt-crushed conglomerates are starting to cut out-of-court workouts with creditors and engineer ad hoc bailouts from the government. It's not pretty--a U.S. bankruptcy judge might be appalled at the chaos and special dealing. But the hope is that these arrangements may give key companies the debt relief they need. And if the Indonesians can pull off some complicated, sizable debt deals, they could provide a model for workouts elsewhere in Asia.

CRITICAL MASS. The negotiations under way are now reaching critical mass. A recent report by the Finance Ministry lists the companies that are talking with creditors to reschedule some $11 billion in bad debt. Indonesia's large conglomerates are leading this charge because their executives fear another collapse in the rupiah after the first quarter. That's when the International Monetary Fund administers the last payment of its $18 billion aid program. These funds are a key factor supporting the rupiah at its current level, since the central bank gets the aid in dollars, then changes it for Rupiah to be used for various recapitalizations and loans. Though it's weak, the rupiah is still double its value of 12 months ago. But a Jan. 12 survey of Jakarta-based executives concluded that the current exchange rate was "totally unrealistic."

Executives also figure that riots will erupt before parliamentary elections in June and shake the currency markets further. "People are concerned things will get out of hand, with all the political parties running," says bank and property tycoon James Riady. So before more turmoil sours the atmosphere for negotiations, the big companies wantdebt workouts in place. So does the IMF, which is appointing outside mediators to move things along. Richard A. Gitlin, an international bankruptcy lawyer from Hartford, Conn., is one such mediator. Says Gitlin: "It helps to have an outside intermediary narrow down the issues and make hard decisions, and say, `Sir, you have to make a sacrifice."'

Gitlin played a key role in the January deal between conglomerate Bakrie & Brothers and its creditors. Prodded by Gitlin, Chairman Aburizal Bakrie offered his creditors equity stakes worth 80% of his five key assets, including shares in the Iridium satellite cell-phone network. Bakriealso offered to cede 20% stakes in 23 other companies. In exchange, creditors will forgive Bakrie $1.5 billion in debt. Gitlin ordered Bakrie and his general manager, Nalin Rathod, to leave the negotiating room for three hours before creditors agreed to the deal in principle. "Everybody was in a mood to strike a deal," says Rathod. "We had to get on with life."

Not all these debt-for-equity swaps are as tough as they look. Bank Indonesia, the central bank, will chip in $480 million to recapitalize James Riady's Bank Lippo, which has a portfolio crammed with bad loans. In exchange, thegovernment gets a 70% stake in the bank. But instead of relinquishing management, Riady still runs the show. And he has the right to buy back the government's stake in the publicly traded bank at the current low share price.

Riady denies he is getting a bailout. Yet the details of the Lippo deal, which may involve a complicated convertible bond issue or share dilution, won't be announced for weeks. The secrecy shrouding this deal--and others the government is involved in--make some investors wonder if the Finance Ministry is playing favorites. "Why all the smoke and mirrors if you're trying to do something that's good for the economy?" demands a Singapore-based banker who is negotiating one of the workouts. He speculates that "the government had to select a small number of banks [for recapitalization] and would not be able to justify its selection." Riady, however, says more than 100 Indonesian banks will get the same workout terms as Bank Lippo.

Yet there's no doubt that it's the best-connected tycoons who are getting their deals done. Now a member of parliament, Riady serves Indonesian President B.J. Habibie as "business ambassador" to Asia's overseas Chinese community. Bakrie, Indonesia's most prominent pribumi (indigenous Muslim) businessman outside the Suharto family, has ties with populist ministers in the Habibie government, chairs the Indonesian Chamber of Commerce & Industry, and may land a lucrative contract to distribute government-subsidized palm oil. Soewandi is the daughter of Sumarno, a former central bank governor and Finance Minister. She was finance director of Astra when it was run by the Suharto-controlled Nusamba Group.

ON THE SLY. At least Astra intends to settle its debts honorably. The word in Indonesia is that other companies are selling assets on the sly before their banks seize them. In the past few months, foreign purchasers have been shipping knocked-down assembly plants out of the country, says one finance industry executive. In early January, an Arab buyer in Jakarta purchased two late-model Mercedes-Benz sedans and a printing press from a company: He had brought along a purchasing agent and a mechanic to check out the merchandise. "The lenders don't even know about it," says the executive.

In this no-man's-land, foreign lenders may have no choice but to take the best terms they can get. If enough deals get done before the crisis worsens, confidence could start to return, and the conglomerates could rebuild their creditworthiness. Maybe then they can learn to run their businesses more prudently--and put the bad practices of the Suharto era behind them.

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