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Indonesia: Investors warned of possible fallout

 


October 29, 2008

Indonesia: Investors warned of possible fallout from Bakrie debacle

The country’s securities houses and investors could be on the brink of collapse should the Bakrie group of companies fail to immediately settle its looming debt problem, local daily the Jakarta Post quoted experts as saying.

A decision by the capital market authorities to prolong a trading suspension in shares of some Bakrie firms was made to protect the firms as well as the entire industry from folding, the daily said.

Indonesia Stock Exchange (IDX) president director Erry Firmansyah said the majority of securities houses had high exposure to the Bakrie stake, and a rush decision to lift the suspension would “put the whole industry in jeopardy”.

“The entire capital market is exposed to the risk of the Bakrie companies.

Careful measures are needed, otherwise the industry will collapse,” he said.

Trading in PT Bumi Resources, PT Energi Mega Persada and PT Bakrie & Brothers has been suspended since Oct. 7.

The market capitalisation of the Bakrie stake accounts for 35 percent of the total equity market, with Bumi, the group’s most valuable unit, accounting for 26 percent.

The value of Bakrie shares stood at 107 trillion rupiah (US$10.7 billion) on Oct. 3, but plunged to around 70 trillion rupiah on October 6 in the wake of the global financial turmoil.

Sources in the market say some securities houses face serious liquidity problems because banks have refused or limited lending since the Bakrie debacle.

“Their stakes in some Bakrie firms have also devaluated so much that most of them face collapse if the (Bakrie debt) deal cannot help them push the stake value higher,” said a source at a securities firm.

A debt-raising scheme through a repurchasing agreement, also known as a repo, has been blamed for putting the Bakrie group of companies and some securities houses in trouble.

A repo is similar to a secured loan where creditors receive securities as collateral to protect against default. Companies often sell stakes for cash to a creditor and agree to repurchase those stake at a later date.

The Bakries, the nation’s richest family, are in the process of selling a 35 percent stake in Bumi and Energi Mega to raise $1.2 billion.

Bakrie needs to sell its assets to accelerate debt payments after shares of Bumi and other Bakrie firms, pledged as collateral for $1.43 billion in loans, plummeted during the stock market havoc earlier this month.

The value of the committed shares was initially estimated at $6 billion, but fell to $1.35 billion on Oct. 6, prompting creditors to demand Bakrie inject more money to ensure their worth as collateral, or risk the assets being seized.

The IDX’s Erry said the repo had contributed to the mess in the stock market. He added the authorities were studying a mechanism to regulate the practice to avoid similar scenarios from playing out again.

“We will regulate the repo scheme after there is a settlement in the stock market. We will either ban the repo, regulate it or limit its eligible amount,” he said.

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