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Skip Navigation LinksHome :: Back Issues :: Big advance in debt dealings

May 2001

Big advance in debt dealings





       
President
Abdurrahman
Wahid
Ever since the first sod was turned on the site, the $1.25 billion Chandra Asri petrochemicals plant has been trouble. For 10 years an icon of Indonesia's problems with corruption and cronies, the project was set up jointly by Bambang Trihatmodjo, second son of former President Suharto, and his close friend Prajogo Pangestu, an ethnic Chinese timber tycoon.
Right from the start it has embroiled government ministers, foreign officials of aid agencies and banks, Japanese businessmen and Indonesian politicians in almost continuous controversy.
Its political hot potato status did not end when the plant, now technically bankrupt, landed under the custodianship of the Indonesian Bank Restructuring Agency, a government body set up to clean up the mess left by the 1997 Asian financial crisis.
Last year, a sweetheart deal to rescue it, signed off by new President Abdurrahman Wahid, prompted a strong anti-corruption campaign that could still lead to the president's dismissal from office. Anger over the rescue package, which exposed the government to a virtually unlimited financial drain, encouraged the IMF to delay a $400m loan late last year.
But now a confident IBRA, equipped with stronger powers under former Citibank man Edwin Gerungan, may have secured a deal to resolve the Chandra Asri problem.
After persistent lobbying, IBRA has won the right to impose legal control over companies where it is the main creditor. In collaboration with the IMF it has also set up clear transparent principles for debt restructuring which will apply to all top companies. Sweetheart deals will no longer be possible. A new, tougher, restructuring deal has now been announced.
"Before, the system was vague," says Liny Halim, investment analyst at ING Barings in Jakarta. "Owners could siphon off revenues which should have gone to repay debt. IBRA was not able to change management. The new debt restructuring principles are transparent and that is a big advance."
Chandra Asri owes $723 million to Marubeni, and $450 million to IBRA, mostly debt to state banks which the agency has assumed. Well aware of the plant's profitability problems, Wahid had agreed to a deal that would have required IBRA to swap its debt for an 80% stake in the project, and repay Marubeni's $723 million over nine years at Libor plus 2.5%.
Ministers and analysts were furious that the deal allowed the two cronies off the hook. The IMF was horrified at the long-term drain on the state budget.
The owners of Chandra Asri have been outwitting ministers and the multilateral organisations for years. Infighting over the loss-making plant started in the late 1980s when Bambang and Prajogo announced version one of Chandra Asri, costing a massive $2.5 billion with initial funding by an easily acquired $500 million letter of credit from a state-owned bank. At the time Indonesia was the darling of foreign investors and a year later ministers watched in horror as more huge projects dreamt up by Suharto's family and friends appeared on the drawing board, causing foreign debt to balloon, and creating serious concern in the World Bank.
A team of 10 ministers eventually prevailed on Suharto to order the cancellation or postponement of numerous projects including Chandra Asri. Only six months later however, Suharto announced that foreign investors would be able to own 100% equity in selected projects, a breakthrough for Indonesia at the time. One of the first beneficiaries, Chandra Asri, converted overnight through Hong Kong based offshore companies into a foreign invested company with the same Indonesian owners - now technically foreign - and one new one, Marubeni of Japan.
The demands didn't stop when the plant got into production.The owners' political clout eventually resulted in the imposition of a 20% tariff protection for ethylene and polypropylene after a lengthy battle with a new set of cabinet ministers. Despite the protection, Chandra Asri has never been profitable. Last year it made a loss of $97.7 million, despite a 59% increase in sales to $513 million.
Pinning Bambang and Prajogo down has been no easier for Indonesia's new democratic government, despite the loss of support after the resignation of Bambang's father in 1998.
Last year the pair managed to persuade president Wahid that the plant was an essential export earner that deserved a special deal.The row that followed news of that deal was indirectly responsible for the replacement of the former head of IBRA by Gerungan, one of whose first acts was to call in Prajogo and include him again in the deal.
Under threat of criminal prosecution in a separate case, Prajogo agreed to assume a 49% stake in Chandra Asri and has pledged assets to cover the $450 million IBRA debt. The new deal reschedules repayment of Chandra Asri's debt to Marubeni over 15 years at Libor plus 1.5%. Marubeni will convert $100 million of the debt into an equity stake in the project.
IBRA's stake will be set at 31% and it will remain a creditor for the amount of $50 million. The assets pledged by Prajogo in return for his stake will now come under IBRA's direct control.
Only one stumbling block remains: approval by Marubeni which has repeatedly resisted Jakarta's efforts to pay more.






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