Indonesia’s pile of pandemic-related corporate debt is offering some investors the chance to cherry-pick cheap assets before a government forbearance program runs out next year.
The two-year-old government plan gives creditors and debtors time to resolve billions of dollars worth of loans to companies including airline PT Garuda Indonesia to prevent wholesale bankruptcies from the Covid-induced slump. Banks are keen to reduce their exposure to the distressed loans — worth about $44 billion in total at the last count in February — before the program ends in March 2023, prompting debt specialists such as Värde Partners and Helios Capital to mine the data for bargains.
While Indonesia’s recovery has been slowed by the global economic shocks from the war in Ukraine, rising inflation and higher energy prices, its economy is doing better than many other emerging markets, helping to draw investors who have been burned by China’s property crisis or put off by the risks in nations that have more exposure to Russian sanctions. Once the forbearance program ends, banks may have to write off much of the remaining debt that couldn’t be sold or restructured.
Bad Debt
Värde Partners is seeing opportunities to buy non-performing loans and other loan portfolios directly from Indonesian banks, as well as to acquire or fund businesses that have recently come out of restructuring, according to Hanli Mangun, senior managing director at the alternative investment firm. Värde also sees opportunities in sectors of public markets that are trading at distressed yields, especially in real estate, “where we believe that securities are being priced at a discount to their intrinsic value,” said Mangun.
At the current average price of 20%-30% of the original value, Indonesia’s distressed assets offer a good deal, said Sendang Pangganjar, co-founder and partner at financial advisory firm Helios Capital Asia. “This is where you can still find good returns.”
Dark Days
Millions of businesses around the world were forced to shut operations when the pandemic erupted, threatening economic collapse in many emerging economies. Indonesia’s PT Sri Rejeki Isman and PT Pan Brothers, the nation’s two largest apparel makers, were among those that missed payments on dollar syndicated loans and had to engage in lengthy restructuring with creditors. For Indonesia, it was a bitter reminder of the dark days of the Asian financial crisis in the late 1990s, when bad debt, especially for dollar bonds, threatened the financial system and many companies went bankrupt.
To prevent history from repeating itself, Indonesia’s Financial Services Authority initiated in March 2020 a regulatory forbearance on restructured loan classifications to take some pressure off the banks. The measure allows lenders to temporarily classify loans being restructured due to the pandemic, giving time for banks and borrowers to address non-payments that arise.
In the first two months of the program, the authority reported that around 1,000 trillion rupiah-worth ($69.6 billion) of loans were being restructured, equal to about 6% of Indonesia’s gross domestic product that year. As the pandemic wore on, the figure rose, reaching the peak of around 1,200 trillion rupiah at the end of September 2020. While the pace has slowed this year and some debt has been settled, the outstanding amount under the program was still about 638 trillion rupiah at the end of February, the authority’s latest data show.
“We will see an increase in distressed assets in the coming months,” said Alfonso Garcia Mora, vice president for Asia Pacific at the International Finance Corporation. Mora is responsible for all IFC operations in the region, including Distressed Asset Recovery Program, through which IFC has invested around $250 million in distressed assets in Indonesia. “In normal circumstances, that is the result of a crisis.”
How much of the debt will fail to be restructured and end up as non-performing loans on bank balance sheets remains to be seen, but much will depend on the speed of Indonesia’s economic recovery.
“These waivers and concessions to real businesses provided by financial sectors are like a time bomb that can explode any time if the recovery doesn’t come as expected,” said Soo Cheon Lee, chief investment officer at global banking and asset management group SC Lowy.
Banks remain confident that they still have time to bring the portfolio of distressed debt down to reasonable levels before the clock runs out. State-owned PT Bank Mandiri, one of the country’s biggest lenders, expects not to be able to salvage 3% of the total loans it is currently restructuring, President Director Darmawan Junaidi said in a parliamentary hearing on March 30. “There’s about 11% of the loans that we consider high risk and 3% that we will downgrade to non-performing loans,” he said. Junaidi said the lender is inviting investors to manage the non-performing loans.
PT Bank Tabungan Negara is getting ready to classify 7%-8% of the pandemic-hit debt as bad loans, according to Vice President Director Nixon Napitupulu. It’s weighing options on how to deal with them, including putting the soured loans up for sale.
But further economic shocks could make life even more difficult for troubled businesses. “Inflation, monetary policy tightening and global geopolitical risks all have the potential to hinder recovery,” said Heru Kristiyana, FSA commissioner who oversees the banking industry. And “the pandemic has had a scarring effect on the real sector.”
Balanced against that, Indonesia’s palm oil and energy sectors have benefited from soaring commodity prices, keeping the currency fairly stable. But the nation overall is not immune to the broader fallout from rising prices, exacerbated by Russia’s invasion of Ukraine, and like other nations it faces a tightening of fiscal policy to prevent inflation spiraling out of control.
Balanced against that, Indonesia’s palm oil and energy sectors have benefited from soaring commodity prices, keeping the currency fairly stable. But the nation overall is not immune to the broader fallout from rising prices, exacerbated by Russia’s invasion of Ukraine, and like other nations it faces a tightening of fiscal policy to prevent inflation spiraling out of control.
Veteran bankruptcy attorney G.P. Aji Wijaya, founder of Aji Wijaya Co., says businesses will still feel the sting of the pandemic for the next two years. So, with around 19%-20% of total banking loans currently classified as at-risk, new legal problems are a possibility.
Already the pandemic unleashed a wave of debt payment and bankruptcy petitions to Indonesia’s five commercial courts. Filings of new cases jumped to 749 in 2020, from 559 in 2019, and rose again last year to 848. Among those being petitioned is flag carrier Garuda, whose creditors filed 198 trillion rupiah-worth of claims, making it one of the country’s biggest debt restructuring case.
On Standby
The government considers such petitions have reached an alarming rate and is planning to amend the bankruptcy law. The rule was set up in the wake of the Asian financial crisis and doesn’t limit how many times a creditor can file a petition against the same debtor, nor the minimum amount of debt, the two key targets for revision by businesses and the government.
Staggering
Solving those issues could reduce the risk for investors like Värde and SC Lowy to find opportunities among the distressed loans.
“The real economy has been in ‘stagflation’ for a while during this pandemic period and long-term impact of the geopolitical risks is still to be seen, but banks’ waivers and concessions toward borrowers will eventually stop, and we would see a wave of opportunities on the back of this,” said Lee at SC Lowy.
IFC’s Mora said the experience of the Asian financial crisis taught that the important point is to clean up the balance sheets as fast as possible. “This is not just investors making money, investing at a discount on these NPLs,” Mora said. “The more you wait to clean up the balance sheet, the slower the economy is able to recover.”
Source: bloomberg.com.sg April 22, 2022