BONDS Bumi PLC to probe ‘irregularities’ linked to Indonesian family’s main asset
A prestigious London listing backfired on one of Indonesia’s most influential families last week as Bumi PLC launched an investigation into alleged financial irregularities at the Bakries’ Indonesian flagship.
Shares in London-listed Bumi plunged 25% on Monday after it announced an investigation focussed on Jakarta-listed affiliate Bumi Resources. At 148.5p, Bumi shares have lost 85% of their value since the holding company floated in June 2011, through an acquisition of a shell firm that financier Nathaniel Rothschild had created.
Bumi Resources, the Bakrie family’s heavily indebted crown jewel, on Wednesday promised a swift resolution even as analysts warned it risked losing access to the capital markets. Investors, meanwhile, were left to wonder if the fallout would extend beyond the group.
“From an outsider’s perspective, when a board starts an investigation without any regulatory requirement, it looks more like a power struggle and an attempt to clean up some of the details around inter-company transactions than anything else,” said a Singapore-based fund manager who declined to be identified because of the sensitive nature of the subject.
At the heart of the controversy are alleged irregularities involving over US$500m, including some US$300m of funds for subsidiaries and affiliated companies to use to develop new projects, and loans Bumi Resources had extended.
While the developments will renew concerns of poor corporate governance standards in Indonesia, the Bakries will need to prove that their operations can pass the rigorous scrutiny that a London listing entails.
Bond prices showed that the developments severely spooked investors, but then recovered some poise. Bumi Resources’ dollar bonds due in 2017 struck a low of 69 cents on the dollar from the 93/94 levels seen before the demand for the probe was made. However, they recovered during the week to around 80 as investors saw value in the assets.
“Given issues of corporate governance, it is hard to assess how the situation will unfold. It becomes an matter of co-operation between the holdco and opco,” said the fund manager.
Funding squeeze
Standard Chartered analyst Zhi Wei Feng recommended investors seeking high risk-reward buy the 2017 bonds. However, she warned that the company’s tight liquidity position and greater difficulty in terms of fulfilling its heavy debt obligations will continue near term, especially due to the recent negative news flow.
SP lowered its rating a notch to B+ from BB−, noting the company would be hard pressed to service its estimated US$400m of obligations in 2013 in light of subdued coal prices. It warned that the “investigation could weaken Bumi Resources’ position in the capital markets, test its ability to refinance debt maturities, and increase funding costs over next 12 months”.
Concerns about Bumi Resources’ high debt levels and its ability to service these obligations have always been a drag on its 2017 bonds. These now yield 18%, compared with rival Adaro’s BB+ rated bonds due 2019, which yield less than 5%.
Still, the company is underplaying these concerns. Dileep Srivastava, Bumi Resources director of investor relations, said in an e-mail that the bulk of these obligations were without recourse to the company as these were at a subsidiary level.
It is far from clear, however, if Bumi Resources risks losing control of key assets if it allows its units to default on secured loans.
Hairy history
Since the Asian financial crisis of 1997–98, a string of Bakrie firms have been in and out of rehab. They have defaulted on their debts, seen those debts restructured, borrowed again and then defaulted once more to go back to square one. The group, however, has shown an impressive ability to retain control of its assets.
The plunge in Bumi PLC’s share price poses the most immediate problem. The Bakries have pledged their 23.8% stake as collateral for loans, and are facing expensive margin calls after the stock’s slump.
The Bakries sold another 23.8% stake to Samin Tan, another Indonesian mining tycoon, to rectify an earlier covenant breach, and again breached the terms of a new US$437m loan earlier this year in failing to deposit US$100m in cash to make up for the shortfall. Negotiations are ongoing and, given the further falls in share prices, the top-up requirements have only grown, putting the family at risk of losing control of one of its key assets.
Tan, meanwhile, borrowed US$1bn from Standard Chartered to buy the stake in Bumi PLC. As security, he used shares in his own coalminer, Borneo Lumbung Energi, and its operating companies. The loan is performing, but the Bumi stake is now worth just US$140m, driving a rift between the Bakries and Tan and sparking chatter of a potential split.
That adds another dimension to the ongoing tension between the Bakries and Rothschild, who has clashed with the politically connected family several times in the past year.
The lack of detail surrounding the investigation, as well as the background of a battle for boardroom control that led to Rothschild’s removal as co-chairman of Bumi PLC, makes it a complicated decision for investors over whether to buy, hold or exit.
“Investors will have to decide when to catch the falling knife at Bumi,” said Alfredo Viegas, an analyst at Knight Libertas.
“This sort of cross-border partnership (Rothschild/Bakrie) was doomed from the start, given the personalities involved. What we are seeing now is the nasty beginning of a very public divorce … and it will, undoubtedly, throw up more dirt and accusations.”