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An Indonesian telecommunication company found a creative way to ensure that its debt restructuring was approved over some creditors' objections: it loaned itself money and then counted its own votes toward approving the plan.
The maneuver, which distressed debt investors said was unprecedented, was validated by a Jakarta court.
But investors who have sued PT Bakrie Telecom Tbk and its subsidiaries in New York over a $380 million bond say they were barred from voting on the restructuring.
The bond's trustee Bank of New York Mellon said that violated both the terms of the bond contract and the law, without specifying which country's law, according to a letter to Bakrie Telecom seen by Reuters.
The dispute has shaken investor sentiment in Indonesian corporate debt just as President Joko Widodo is pushing for more foreign investment and local companies are trying to raise capital to expand. Foreign direct investment in Indonesia totaled 307 trillion rupiah ($24.1 billion) in 2014, and Widodo has targeted a 12 percent increase this year.
Bakrie Telecom said the bondholders were not eligible to vote on the restructuring plan because they weren't direct creditors. The notes they bought were issued by a special purpose vehicle (SPV) in New York, which then lent the proceeds to Bakrie Telecom.
The SPV, representing $380 million of Bakrie Telecom's debt, cast its votes in favor of the restructuring plan, which was overwhelmingly approved on Dec. 8. Creditor claims that were recognized by the Jakarta court administrators totaled more than $770 million.
"They are now the issuer and the creditor," said Hal Hirsch, a lawyer representing a group of Bakrie Telecom investors who collectively own more than 25 percent of the bond that was set to mature in May. "They shake their own hands, they enter into their own agreement, and they have now effectively eviscerated any claim that the noteholders have."
The next hearing in the bondholders' lawsuit is scheduled on Thursday in a New York state court.
Bakrie Telecom does not recognize the bondholders as its creditors because the company and the SPV that issued the bond are "two separate legal entities," Aji Wijaya, a lawyer representing Bakrie Telecom, told Reuters.
"Whoever the creditor is, the rules of the game here have to be followed," Wijaya said, adding that creditors will not get any money back if the company goes bankrupt.
A Jakarta court approved the restructuring vote on Dec. 9. Hirsch said bondholders chose not to appeal the decision because "the additional time, cost and delay would have been sadly a waste."
Rule of law
Bakrie Telecom is part of Indonesian conglomerate Bakrie Group, which has long carried a heavy debt load.
Creditors have traditionally tolerated the risk because of generous yields and a belief that the group could sell some assets to come up with cash. However various Bakrie Group companies have instead opted for debt restructurings, causing friction with creditors.
Under Bakrie Telecom's restructuring plan, 30 percent of large creditors' debt will be paid in cash installments, with the rest exchanged for mandatory convertible bonds with a conversion price of 200 rupiah per share, about four times the current share price. As the conversion price of the bonds is so far above the market price, some creditors say they are receiving a tiny fraction of each dollar they invested.
"The proposal wipes out the bondholders. If you're in the bond, you're losing everything," said an advisor to a Bakrie Telecom bondholder, who declined to be named due to the sensitivity of the matter.
Some foreign investors say the rules of the game are stacked against them, and they worry that other heavily indebted Indonesian companies may follow Bakrie Telecom's lead if they run into trouble. Falling commodity prices have left Indonesia's debt-laden mining industry exposed.
"It's definitely troublesome," said one fund manager who specializes in buying distressed debt. "Indonesia right now has a lot of credit which could potentially be going into some sort of restructuring. Investors are definitely taking notice of this."
Other recent cases of court-appointed debt restructurings have already made foreign investors "more cognizant of the weakness of the insolvency regime in Indonesia," Vicky Melbourne, senior director at Fitch Ratings, told Reuters.
While the Indonesian government is monitoring foreign private debt, it hopes that any disputes can be settled between the parties involved, Arif Budimanta, special staff to the finance minister, told Reuters.
Nevertheless, he added that the government does want to try to improve investor confidence by strengthening law enforcement and institutions such as the civil court.
"Indonesia needs huge foreign investment to support its growth targets," he said.