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Indonesia’s Bumi Fails to Change Terms of Bonds as Default Looms

Indonesia’s Bumi Fails to Change Terms of Bonds as Default Looms

By Eveline Danubrata & Umesh Desai on 01:10 pm Jun 23, 2014

Jakarta/Hong Kong. Bumi Resources has failed to change the terms of $375 million of debt nearing its repayment deadline, raising the prospect of default and sending shares of the Indonesian coal miner to an 11-year low.

Asia’s biggest thermal coal exporter, controlled by Indonesia’s influential Bakrie family, said it proposed changing the terms of bonds due Aug. 5 at a meeting on Friday but not enough creditors attended to approve or reject.

Bumi is just one of many Indonesian companies to have funded expansion using debt. The miner’s current plight has highlighted the prospect of others having difficulty servicing debt as commodity prices fall and growth in Southeast Asia’s biggest economy slows.

“In the past two years, Indonesian companies have taken advantage of low interest rates to borrow money to expand,” said Maynard Arif, Indonesia head of research at DBS Vickers.

Overseas debt alone jumped 13 percent in the private sector to $145.6 billion as at the end of April from a year earlier, central bank data showed.

“There are some worries about Indonesia’s slowing economic growth, and some of the loans are in US dollars, so when the rupiah weakens the companies are also hit,” Arif said.

Bumi, whose long-term dollar debt was $2.03 billion at end-2013, has been struggling with a decline in coal prices over the last few years as falling demand from China — one of the biggest consumers of the commodity — exacerbates oversupply.

As a result, Bumi reported two consecutive years of net loss and was forced to restructure debt owed to sovereign wealth fund China Investment Corporation.

Defaulting on the Aug. 5 bonds is likely to further damage investor confidence and significantly impair Bumi’s ability to renegotiate future debt payments, analysts said.

Proposal

Bumi wanted to repay the $375 million worth of bonds later than their Aug. 5 due date, lower their 9.25 percent coupon — or interest rate — and cut the 3366.9046 rupiah price at which holders could convert the bonds into shares, local media reported.

At Friday’s creditor meeting, Bumi proposed extending the maturity to July 2021, lowering the coupon to 7 percent, and cutting the conversion price to Rp 750, Bloomberg News reported on Monday, citing a Bumi memo dated June 5.

But holders — which as of the end of April included SW Asset Management and Ashmore Investment Management — may have stayed away from the meeting in the hope of more favourable terms, analysts said.

Shares of Bumi fell on Monday by as much as 16 percent to Rp 129, the lowest since 2003 and far below the bonds’ conversion price. The stock has fallen 57 percent so far this year compared with a 13 percent rise in the broader market .

The 9.25 percent bonds due Aug. 5 were quoted at 37/40 cents on the dollar from around 60 at the start of the year, partly in reflection of weak coal prices. The benchmark Newcastle weekly spot index has fallen about 18 percent.

Indonesian coal companies are “in panic mode” and plunging thermal coal prices is likely to force some small and low-margin producers out of business before the end of the year, the chairman of Indonesia’s Coal Mining Association said last week.

Rights issue

Bumi Resources is controlled by the Bakrie family whose patriarch Aburizal Bakrie chairs Golkar — Indonesia’s second-biggest political party and backer of former special forces general Prabowo Subianto in the country’s July 9 presidential election.

The miner is part of the Bakrie Group which earlier this year exited London-listed Asia Resource Minerals, formerly Bumi Plc, after a lengthy spat with fellow co-founder Nathaniel Rothschild.

Earlier this month, Bumi said its lenders had agreed to close a debt-to-equity swap with CIC, enabling the miner to pay the 12 percent coupon on $300 million worth of bonds maturing in 2016.

Bumi also said it intends to pay some of its CIC debt with an up to Rp 6.54 trillion ($554.7 million) rights issue — or selling shares generally at a discount with current shareholders given the first say on whether they want to buy.

“The plan to reduce much of its debt is a good strategic plan, but Bumi should concentrate on rebuilding investor confidence because the upcoming rights issue would not be effective if the share price is as low as today,” said analyst William Suryawijaya at Indosurya Securities.

The miner will hold an extraordinary general shareholder meeting on June 30 to approve the rights issue and transfer the stake in a subsidiary to CIC “as soon as possible”, Bumi Director Dileep Srivastava said on Monday in an e-mail to Reuters.

Bumi will also keep trying to “reduce debt and extend maturities as optimal”, Srivastava 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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