Facing Deleveraging Pressure

Indonesia

Economic News

22 Jul 2010
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Investors in Indonesia's capital markets are carefully monitoring and awaiting the finalisation of a corporate deal that they hope will result in an end to the nearly month-long speculation and turmoil surrounding the suspension of trading in the shares of Bakrie & Brothers, the country's largest company by stock market capitalisation.



The Bakrie Group has shareholding interests in some of the country's most active mining, telecommunications, oil and gas, property and plantations firms, and is connected to current Welfare Minister Aburizal Bakrie - the country's richest man according to Forbes Magazine.



Bakrie's share price and that of its five affiliates dropped 41% on October 6 on investors' worries about the group's financial health and outstanding loan obligations. This sharp fall led the Indonesia Stock Exchange (IDX) to suspend trading in Bakrie's backed stocks the next day to cool off the market.



However, with Bakrie-backed companies accounting for four out of 10 of the country's most actively traded stocks, the market suffered a tumultuous day on October 7, closing 10% down. The adverse market reaction prompted the authorities to close all trading in the entire Jakarta Stock Exchange for three days.



These events clearly demonstrate the firm's weight in the entire capital markets system. Subsequently, the country's regulator has indicated that the suspension in trading of selected Bakrie- affiliated companies would remain in force until investors' uncertainties are cleared through a full resolution of the group's debt repayments.



While the Bakrie group is not openly discussing the specific terms of its debt obligations, many analysts reckon that the company is overleveraged. The company borrowed $1.1bn last year from at least seven financial companies including JPMorgan and ICICI Bank, using shares in affiliate companies as collateral against the loans. With a significant drop in the groups' net worth, and hence a drop in the value of collateral held against outstanding loans, the company has indicated it intends to relieve its debt burden by raising $1.2bn in share offering.



So far, the company has successfully boosted its capital by raising $56m. Avenue Capital Group took the lead and recently agreed to take a 15.3% stake in property developer Bakrieland Development, while Longines Offshore bought a 5.6% stake in plantations firm Bakrie Sumatera Plantations on October 16.



Other candidates in the Bakrie portfolio include telecommunications player Bakrie Telecom, oil and gas operator Energi Mega Persada and coal giant Bumi Resources.



Bakrie Telecom, for which the Bakrie group owns a 37% stake, has seen its share price fall by more than 70% in the past month. Trading was suspended on October 30 following reports of a pending sale in the company to a number of interested parties. The Bakrie group also holds a 40% stake in Energi Mega Persada, which was valued at $205m as of the last day of allowable trading in the firm on October 7.



But it is the group's 35% stake in Bumi Resources, Asia's third largest coal producer by sales according to UBS, valued at approximately $1.5bn when trading was originally suspended on October 7, that is considered the "bread and butter" of the Bakrie empire and the most suitable candidate to raise the required funds to fulfil its debt obligations. Bumi's share price has tumbled 75% since reaching an all-time high on June 12, and over that same period, shareholders have lost over $13bn. When the share price peaked in June, Bumi was considered the single most valuable listed company in the country by market capitalisation, according to Bloomberg.



On November 1, it was announced that a consortium led by Northstar Pacific - a local subsidiary of US private equity firm Texas Pacific Group - had agreed to pay $1.3bn for a 35% stake in Bakrie.



It is also believed that a number of state-owned firms - including coal producer Tambang Batubara Bukit Asam Batubara, state nickel producer Antam and tin producer Timah - are involved in the consortium.



The president director of Bukit Ansam has officially confirmed the group's participation, while both Antam and Timah have publicly stated that they are awaiting the results of a due dilligence report from Northstar before committing fully. The Bakrie Group has indicated that Northstar will need between 21 and 28 days for due diligence before the deal is officially completed, but that the deal is unlikely to be annulled.



Meanwhile, Bapepam, the country's capital markets watchdog, had originally indicated that trading in Bumi would remain suspended until full plans regarding the Bumi stake sale were finalised. Analysts believed that lifting the suspension would harm the deal, as the Bumi stake would devalue further with investors selling off their shares amidst uncertainty. However, on Thursday, November 6, the trading suspension was lifted following a last minute intervention from the Ministry of Finance. Shares fell more than the 9% on the first day of trading and continued into the new week, with shares opening 9.6% lower on Monday. The good news, however, is that this time the overall impact on the market has dampened, as the country's exchange overall has seen a 2.5% jump.



Overall, legislators are also calling for further transparency and disclosure over the deal, expressing concerns that the government might be misusing the state firms involved in the share purchase to benefit the politically connected company. One House of Representatives Commission member has called it a "blatant indication of state firms being used as cash cows for ruling politicians", saying that the country should instead prioritise the use of its financing for the expansion of state firms.



Regardless of how the deal plays out, both investors and regulators are hoping for a swift resolution of the uncertainty surrounding the Bakrie group's debts, and are looking forward to a deal being finalised so that normal activity can return to the exchange. While the saga has had an adverse affect on the market, it is hoped that it will prompt the Bursa to encourage more listings to reduce the impact one company can have on the entire exchange.

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