👟 Walk the Talk: Krakatau Steel
Acrostics Asia flagged that the Indonesian state-owned steel maker has parallels with the debt-laden textile companies that cling to a shrinking lifeline.
Krakatau Steel is a perpetual burden for Indonesian officials as the state-owned steel maker continues being weighed down by weak sales and a rusty credit standing.
Acrostics Asia flagged that Krakatau’s financials resembled Indonesian textile companies Sritex and Pan Brothers, which relied on working capital loans to cover their cash conversion gap and fell into distress when the banks pulled this lifeline.
Key Timeline
Acrostics Asia wrote that Krakatau Posco was heralded as a successful joint venture between a South Korean steel behemoth and an Indonesian SOE, but it wasn’t immune to headwinds in the Southeast Asian market.
Challenges include cheaper steel imports from China, a cut in Indonesia’s infrastructure spending and a weaker rupiah.
Krakatau Steel asked Indonesian sovereign fund Danantara for USD 500 million in working capital and will request another USD 500 million for its restructuring.
To secure raw materials, Krakatau obtained third-party financing that carried higher rates than banking facilities and imposed restrictions on the company.
Danantara is set to provide working capital for Krakatau, but this must come with a management overhaul.
Acrostics Asia wrote that apart from the challenging sales outlook, the steel maker will also struggle to find private lenders on its own.
Part of the funds requested from Danantara could be used for an upfront cash component or discounted debt buyback in Krakatau’s restructuring.
Acrostics Asia wrote that the issue is Danantara cannot print money to keep Krakatau and other ailing SOEs on perpetual life support.