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Indonesia Leads Defaults as Bakries Face a Third Time Around

Indonesia Leads Defaults as Bakries Face a Third Time Around

By David Yong & Harry Suhartono on 08:56 am Jun 20, 2014

Indonesia’s Bakrie family is seeking to avoid a third default on its companies’ debt in 16 months as the nation accounts for 74 percent of dollar bond delinquencies in Southeast Asia since 2008.

Coal miner Bumi Resources needs at least three quarters of votes at a noon bondholder meeting in Singapore on Friday to approve extending the maturity of $375 million of convertible bonds due in August by seven years, according to a memorandum sent to investors. The company, which was part of a failed venture between the Bakries and British financier Nathaniel Rothschild, missed a June 5 coupon payment and said it probably can’t redeem the notes without the delay.

“The case with Bumi is not reassuring to investors and doesn’t help the image of the country,” Tobias Bettkober, an investment adviser at Holinger Asset Management in Zurich, which previously owned the convertibles, said in a Wednesday interview.

Businesses of the family, which in March completed a $501 million deal to sever ties with Rothschild, have been knocked by falling coal prices and rising interest rates just as its patriarch Aburizal Bakrie was forced to abandon his presidential bid. A failure to repay will see Bumi join seven local companies, including Bakrie Telecom and Bakrieland Development, that missed payments on $1.53 billion of dollar bonds since 2008, compared with the $2.06 billion total in Southeast Asia, Bloomberg-compiled data show.

Worst debt

“The Bumi issue is linked to weak sector sentiment, low coal prices, rising fuel prices and shrinking margins,”  Dileep Srivastava, a Bumi Resources director based in Jakarta, said in an e-mailed response to questions on Thursday.

Distressed debt sold by Indonesian companies fell 6.1 percent this year through Wednesday, the worst performance among such notes in developing nations, according to a Bank of America Merrill Lynch index. A gauge of distressed US junk bonds gained 7.5 percent in the same period.

Bumi Resources is seeking to extend the 9.25 percent bond’s maturity to July 2021, reduce the annual coupon to 7 percent and change the conversion price to Rp 750 (6 cents) from 3,366.9 rupiah, the June 5 memorandum shows. The notes fell 0.4 cents to 38.409 cents on the dollar on Thursday and lost 29.4 percent in 2014.

Business, politics

Achmad, Aburizal’s father, founded what would become the Bakrie group in 1942, trading rubber and coffee before expanding into steel, energy and property. As the Asian financial crisis unfolded, the group suffered under $2.5 billion of debt, forcing it to hand over 95 percent of the Bakrie & Brothers unit to creditors in a restructuring in 2000.

In December, Bakrie Telecom missed a coupon on $380 million of 2015 notes, while Bakrieland didn’t make a put option payment on $155 million of 2015 convertible debt in March last year.
“I wouldn’t say the group is a willful defaulter, but there are issues about governance and transparency in some of the units,” Nitin Soni, a director in Singapore at Fitch Ratings, said by phone on Thursday. “Some of the problems are due to poor management and the weak outlook in industries like telecoms and coal. They have stopped talking to us over the past year.”

Bumi Resources’ shares have slumped 45 percent this year in Jakarta to 165 rupiah, while the Jakarta Composite Index jumped 13.8 percent in that time. Bakrie Sumatera Plantations, Bakrie & Brothers, Bakrie Telecom and Bakrieland all trade at the 50 rupiah minimum price.

Aburizal, chairman of the business empire through 2004, has since dedicated himself to politics. He chairs Golkar, the second-biggest political party, which joined a coalition backing the presidential bid of Prabowo Subianto, the sole rival of front-runner Joko Widodo, ahead of a July election.

Hedge funds

“There is some demand from hedge funds on the Bakrie and Bumi names, who trade on the news flow and momentum rather than on fundamental view of the credits,” Daren Wong, head of Asia high-yield trading in Hong Kong at VTB Capital, said by phone on Wednesday. “In Indonesia, and especially for these names, you need to have good insights to trade them, or you don’t touch them at all.”

Indonesia’s economic growth has been restrained by rate increases last year that curbed investment and a mineral-ore export ban that hurt mining. Growth slowed to 5.21 percent in the first quarter, the weakest pace in more than four years.

The rupiah rose 0.5 percent to 11,934 per dollar on Thursday from a four-month low. The cost of insuring Indonesia’s debt against default for five years fell 93 basis points this year to 149, CMA data show, after reaching a one-year low of 135.5 on June 9.

Survival plan

Bumi Resources’ proposed debt restructure is part of the company’s survival plan after averting a default last month on $300 million of 2016 notes. Banks including Credit Suisse Group and China Development Bank have consented to a separate plan to ease $4.7 billion of short-term liabilities at Indonesia’s biggest thermal coal producer.

As with peers Mongolian Mining and Chinese miner Hidili Industry International Development, Bumi Resources is reeling from a two-year slump in coal prices. Indonesia’s benchmark price has fallen 8.3 percent this year to $73.64 a metric ton, sinking to the lowest since 2009 in May.

“When you combine those macro factors with some of the other issues that exist within the Bakrie group more broadly, Bumi in particular, investors need to be aware of those things and treat them name by name,” Ashley Perrott, the Singapore-based head of pan-Asia fixed income at UBS Global Asset Management, said by phone on Wednesday. “There’s no doubt it damages sentiment towards the market and you get some risk aversion, but then investors work their way through that.”

Holinger’s Bettkober said he traded Bumi Resources’ convertible bonds through their peak in mid-2011 and cut his last holding in March 2013 at just under 87 cents on the dollar. He isn’t getting back in soon.

“It’s a tough name to make money on,” he said.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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