When engineering and textiles giant Texmaco announced the first of what promises to be a series of defaults on credit last week, the country got an abrupt reminder of the disgraceful price it is still paying for bailing out near-defunct crony conglomerates.

The Indonesian Bank Restructuring Agency (IBRA), established to manage assets nationalized after the financial crisis of the late 1990s, was apparently unprepared to deal with Texmaco's inability to honor a letter of credit due in the first week of April – but all signs point to more trouble ahead.

Texmaco is the single biggest debtor to the government after it injected over Rp28 trillion to keep the company afloat at the height of the crisis. Few believe the company is really worth the price the government paid.

Only last week IBRA admitted that the recovery rate on a selection of collateral assets surrendered by indebted former bank owners was less than 10% of the book value reported when the assets were proffered as collateral on government loans.

Head of IBRA's asset management investment division Edi Sinaga said the assets handed over by four conglomerates had a book value of over Rp107 trillion but added that IBRA would only recover around Rp10.5 trillion when it sells them before July this year.

These conglomerates at least surrendered assets – albeit at heinously marked-up prices – but not Texmaco.

Texmaco signed an agreement with IBRA during the administration of former president Abdurrahman Wahid in May 2001. Under the deal, the company pledged to hand over all its assets to a new holding company under IBRA, but Texmaco boss Marimutu Sinivasan retained effective control.

Amid widespread suspicion of massive collusion with government officials, IBRA "watchdogs" were only represented at the holding company level and not within the conglomerate's units.

A source of Singapore's Business Times confirmed that IBRA did not review transactions until after they had been carried out – a system apparently favored by both sides thus far.

Long absence

Texmaco and Sinivasan have been noticeably absent from the headlines in recent months. This changed on Monday last week, when Sinivasan made a rare statement to the press in which he – promised – to pay 30% of the Rp1.137 trillion channeled into his now defunct Bank Putera Multikarsa by the end of the month.

Under the so-called Shareholders Obligation Resolution scheme (PKPS), obliging debtors may escape criminal prosecution for misuse of the funds provided but this hasn't stopped Sinivasan and numerous other debtor-tycoons from virtually ignoring it.

Sinivasan said an account containing Rp260 billion at Bank Central Asia (BCA) would be used but the account had already been blocked by the central bank, reported detikcom.

Bank Indonesia director of bank monitoring Anton Sabar Torihoran said the block was being studied by BI and IBRA officials but he was unwilling to comment further.

Perhaps something was afoot at the highest level of government and banking circles?

Alarms ring out

When Texmaco announced that it was unable to honor a Letter of Credit (LC) facility from Bank BNI, few were surprised that the country's largest ever corporate debt workout could be in danger of collapse.

The real cause for alarm was that the company had defaulted on such a piddling amount – just $29 million that BNI lent to the holding company with IBRA's guarantee.

Bank BNI has $99 million in LCs tied up at Texmaco and its public push for IBRA support in the default matter raised eyebrows, as the state-run bank was assured of IBRA's guarantee.

Worse still, IBRA chairman Syafruddin Temenggung admitted on Tuesday last week when the alarm bells were ringing loudest that the LC had been taken out by Texmaco's textile unit PT Polysindo Perkasa but the funds had been diverted into its equally troublesome engineering unit.

The company and IBRA spokespersons argued that Texmaco was suffering a cash-flow crunch due to the rising costs of raw materials and the recent lull in the global economy.

IBRA's asset management credit division head Mohammad Syahrial admitted the textile unit was running at a loss, reported detikcom

He also let it slip to the press that Texmaco had obligations in excess of $70 million falling due in the near future – although he did not specify the timeframe or the measures proposed to meet payment deadlines.

IBRA steps in

On the Tuesday, IBRA spokespersons said they were concentrating on how Texmaco could restructure its $29 million LC.

Temenggung said IBRA would "request" that Sinivasan provide his own funds to support the working capital of the engineering unit, while the textile unit would likely receive $20-30 million from the banking sector, although he declined to elaborate.

There were also assurances that IBRA would separate the textile and engineering units and assume greater control over both, while Temenggung estimated that IBRA would place around seven financial controllers within Texmaco.

By Thursday after a meeting of IBRA, BNI, Texmaco and Finance Sector Policy Committee (KKSK) representatives, Temenggung announced that IBRA would pay the outstanding $29 million to BNI if Sinivasan was unable to pay immediately. But, he added, the tycoon would have to provide collateral of an equal value, reported detikcom.

When quizzed on why Texmaco was receiving special treatment, IBRA's Syahrial outright denied that Texmaco benefited from any "particular facility" backed by the government or that the state would suffer losses due to the default.

Interestingly, the minister in charge of IBRA, State-owned Enterprises Minister Laksamana Sukardi, apparently did not share Temenggung and Syahrial's enthusiasm for the bailout.

He told reporters Thursday that the risks should be born by the banks involved because their function was to develop strategic and successful businesses.

"So, hand the problem of covering the risk over to the bankers. Every kind of loan involves risks and the ones who take on the risks are the banks," he said. Nevertheless, he added that his Ministry was studying the Texmaco case and the bank's ability to cover the risk in terms of its current cashflow.

The agreement reached on Thursday also involved the placement of independent financial supervisors of PT Sucofindo in all Texmaco subsidiaries, reported Asia Pulse.

The KKSK directive issued on the matter also stated that Texmaco's textile and non-textile units are to have separate escrow accounts to better control management and prevent further deviations in funding. The programs contained in the KKSK directive would be reviewed every month, Temenggung said.

The KKSK directive also reportedly obliged Sinivasan to inject $25 million into Newco Texmaco by August at the latest, Syahrial confirmed Friday. The deal was contained in the formal agreement to be signed by IBRA, BNI and Texmaco that very afternoon, he said.

Further news has been scarce but Syahrial said, if Sinivasan is unable to honor its obligations, he would not rule out the possibility of IBRA taking over ownership of Texmaco.

The Indonesian public must only wonder what this dubious "threat" to take Texmaco from Sinivasan will actually entail. No doubt, many already suspect that the state will once again protect the interests of the elite few who continue to burden the country's nascent recovery from the devastation of the late 1990s.