📒 Quick Take: Indonesia’s Restructuring Fault Lines
More Indonesian companies are at risk of re-defaulting on their earlier debt deals.
The potential options are to restructure the debt one by one, protect the key units, or start a new company.
All three options are unpalatable for flag airline Garuda Indonesia, so officials might be tempted to throw just enough cash at the problem.
The fault lines in Indonesia’s restructuring framework have been laid bare as more companies are at risk of re-defaulting on their earlier debt deals.
On the macro front, I flagged that President Prabowo Subianto’s “Golden Indonesia” vision is increasingly diverging from reality, as the accelerating layoffs are forcing Indonesians to tighten their belts. Private investments are also hamstrung by a lack of security, as some businesses were held hostage by thugs masquerading as civic organizations.
A growing number of companies must restructure their debt again even after undergoing a court-supervised restructuring (PKPU). I wrote that Pan Brothers may have to restructure for the third time due to a collapse in textile demand, while Garuda Indonesia could be headed for a fourth one as the flag airline grapples with maintenance costs and an airfare cap imposed by the government.
The first fault line is that PKPU is like a last chance saloon where borrowers have one shot at an in-court restructuring and could be filed into bankruptcy if they re-default, as shown by the demise of Pan Brothers’ peer Sri Rejeki Isman (Sritex) and shipping company Arpeni Pratama Ocean Line).
The second fault line is that a PKPU deal only binds the entities that went through the process, meaning that the subsidiaries that were left out are still exposed to creditor action. Garuda completed PKPU in 2022, but a trade creditor could still file a PKPU petition against its travel system unit, Aero Systems Indonesia, which was granted by a local court last month.
The third fault line is that even if the company pursues another restructuring in a foreign jurisdiction, such as Singapore, the deal may not be recognized in Indonesia. In short, a borrower and its advisers may go through the whole dance with creditors overseas only to find out that a local supplier can turn off the light back home.
Given these fault lines, there are three potential options:
Restructure the debt one by one
Protect the key units
Start a new company
The first option is a huge undertaking for a borrower and its advisers, as they will have to leave no stone unturned and negotiate bilateral deals with each of the creditors.
The second option is worth considering if there are certain subsidiaries that are important enough and vulnerable to creditor action. Out of 15 grounded planes, Garuda’s unlisted budget unit Citilink accounts for 14 while the remainder is under the flag carrier. In short, Citilink is in an even deeper quagmire than its parent and could be the top candidate for a moratorium.
Lion Air’s founders used the third option and set up Super Air Jet, but I wrote that it’ll be harder for Garuda – as a publicly listed state-owned enterprise – to follow this playbook. As for Pan Brothers, even if its management were to start a new entity (Pan Sisters?), some creditors may put up a fight and it’s uncertain how long the new company can last without working capital.
All three options are unpalatable for Garuda, so officials might be tempted to throw just enough cash at the problem and pray that it’ll resurface later rather than sooner. I wrote on 24 April that a direct capital injection from the government would be a tough sell in this economic climate, so rescuing Garuda via new sovereign fund Danantara could be a workaround.
Given that raising fresh funds from investors will likely invite questions, Danantara may pool the dividends it receives from SOEs and transfer the money to Garuda through a shareholder loan. However, if the underlying tumour is not fixed, Garuda should be back in hospital a few years down the road.