📒 Quick Take: Indonesia Credit 2024 Wrap
A review of the key events in Indonesia’s credit market as 2024 draws to a close.
The long-awaited Spotify 2024 Wrapped landed this week, offering insightful statistics on how I spent 96,546 minutes listening to 3,734 songs this year.
In the spirit of wrapping stuff, I will also be reviewing the key events in Indonesia’s credit market as 2024 draws to a close.
Textile Companies Face a Reckoning
Sri Rejeki Isman (Sritex) and Pan Brothers completed their restructurings a couple of years ago, but those deals simply bought them time that eventually ran out along with their cash.
Sritex was declared bankrupt by a local court at the request of a supplier, while Pan Brothers is back in restructuring and has reportedly delayed a vote on its PKPU proposal to 13 December.
I’ve written extensively on Indonesia’s textile crisis so I won’t repeat the details, but these cases kind of raised a philosophical question: What’s the point of a restructuring if it doesn’t address the underlying cause?
It’s like wrapping a patient who has a tumour with bandage and hoping the person can go back to a normal life. There’s a higher chance for the person to return to the operating table than to actually recover.
Perhaps I’m ignoring the practical realities of restructurings, but some of my investor and analyst friends are growing tired of Indonesian situations that are like “Restructuring Unlimited” because there’s no change in the management or controlling shareholders, while the business is not turning around and no new money is coming in.
There’s been a lot of criticism of Indonesia’s legal system, but it’s worth noting that Pan Brothers did a Singapore scheme of arrangement before it took the PKPU route. So the choice of jurisdiction cannot save a borrower if the premise of the restructuring deal is too optimistic.
Indonesia’s textile turmoil has also sparked a trend of the government intervening in private corporate matters.
Even before the Supreme Court makes a decision on Sritex’s appeal, the President had instructed no fewer than four ministers to rescue its workers. Meanwhile, Pan Brothers’ court hearing was briefly postponed last week because the management was summoned by the Coordinating Minister for Economic Affairs.
Textile workers are real people with families and few will argue that they are not worth saving. However, this will require tough choices that someone will have to make.
Indonesia’s High-Yield Universe Shrinks
Several Indonesian borrowers tapped onshore loans to refinance their offshore bonds in 2024, extending the ride on flush banking liquidity over the last two or three years.
Local banks seem to have these preferences:
Commodity or resource companies that were a proxy to the market rally, though some of the prices have dipped.
Borrowers that are perceived to have strong sponsors or shareholders.
Property developers with land and buildings to pledge – bonus point if they are also backed by influential families.
My former colleague Kevin Lim once told me to always give credit when credit’s due (he meant acknowledgment, not the loan type). In that spirit, I think there’s been a lot of negative press on Indonesian borrowers that defaulted on their debt, but not enough acknowledgment for those that tried to do the right thing.
Fitch upgraded Lippo Karawaci to B- from CCC+ in October, after the property developer used most of the proceeds from selling part of its stake in Siloam International Hospitals to reduce its debt.
Fitch said the move addressed Lippo Karawaci’s refinancing risk, which was previously seen as high due to its leverage and insufficient internal cashflow.
Last month, tire manufacturer Gajah Tunggal announced that it obtained a IDR 4.4 trillion (USD 277.3 million) syndicated loan led by Bank Central Asia (BCA), with two tranches maturing in eight and nine years, respectively, to refinance its offshore bond and partly fund its factory expansion.
BCA has a good relationship with the Nursalim family who controls Gajah Tunggal, a banker friend said, noting that domestic banks with a relatively low loan-to-deposit ratio (LDR) like BCA want to secure their long-dated yields in a “higher for longer” interest rate environment exported by US President Donald Trump.
BCA, Indonesia’s biggest private bank, reported an LDR of 72.7% as of end-June, below the market average of 85%, local media reported.
Meanwhile, Modernland Realty is offering a package of bond exchange, distressed tender and consent solicitation as it couldn’t meet the asset sale requirement set in its previous round of restructuring.
The property developer – which must seal a deal by year-end to avoid a default – extended the deadline for bondholders until 16 December.
While Indonesia’s bond world may have contracted, it will likely expand again in time.
SOEs Brace for a Shake-Up
This year, state-owned builders Wijaya Karya and Waskita Karya pulled off their debt restructurings, clearing the path for them to be consolidated into an SOE holding company focusing on construction.
While the restructurings were notable achievements for those involved in the process, if I were to call a spade a spade the deals were essentially kicking the can down the road and the future resolution is even more uncertain with the formation of a new investment body called Danantara.
This is because the key SOEs including Bank Mandiri, Bank Rakyat Indonesia (BRI) and Bank Negara Indonesia (BNI) are supposed to be merged with Danantara and these three state-owned banks have been key players supporting the restructurings of their peers. In short, there might have been no restructuring deal without the state-owned banks.
Extracting the best-performing SOEs and putting them in a new shop might seem great on paper, but executing it is probably not that simple because the SOEs are interconnected. Furthermore, 1+1 doesn’t necessarily add up to 2 if there’s a culture clash or if investors end up getting cold feet.
I wrote in a previous piece that “the market is waiting for Danantara’s shape and form to become clearer in the new year” and a friend quipped that would be like “Waiting for Godot”. Given that the titular character in Samuel Beckett’s play never actually arrives, one hopes that’s not the case with Danantara.