Bill Guerin, Jakarta – Textile and engineering giant Texmaco announced last week that it had defaulted on a US$25 million letter of credit facility from Bank BNI 46. The move prompted the Indonesian Bank Restructuring Agency (IBRA) quickly to announce plans to take tighter financial control of the group's diverse enterprises, raising speculation that Indonesia's largest-ever corporate-debt restructuring deal could collapse.
Texmaco employs 150,000 people and has five factories across Java in its core businesses of textiles, synthetic fibers, garments, textile machinery and machine tools. Some legislators have even called the group a national asset, and its flagship, Polysindo Eka Perkasa, is the world's leading polyester producer and the 12th-largest company in Indonesia.
Marimutu Sinivasan, the 65-year-old founder of the Texmaco Group, though born in 1937 in Medan, North Sumatra, is of Tamil-Indian descent, and, like so many of Indonesia's conglomerate builders, began business as a trader, selling batik from Indonesia and importing cotton from southern India. By the early 1980s his textile business had grown into a manufacturer of small-scale machinery used in the industry and Texmaco was poised to benefit from the low labor costs, subsidized energy and low customs tariffs of the era.
By the mid-1990s Texmaco was selling textiles to 55 countries and Polysindo, among the world's largest producers of polyester, saw revenues almost triple from Rp581.6 billion to Rp1.4 trillion in the four years to 1996.
Sinivasan may now risk losing control over his corporate empire, still buried under more than $3.8 billion in debt, but the man once described as a "symbol of impunity" because of his political clout with former presidents Suharto, B J Habibie and Abdurrahman Wahid still has more cards to play.
IBRA said it still wants to maintain Texmaco's current production process so as not to jeopardize the $2.7 billion debt workout it signed with the conglomerate in May 2001. Under that agreement, Texmaco pledged to hand over all its assets to a new holding company controlled by IBRA until the entire debt was repaid over 12 years. But the government allowed Sinivasan to continue to run the company, unlike other agreements with debt-strapped conglomerates.
IBRA chairman Syafruddin Temenggung admitted that although the recent letter of credit had been taken out by Polysindo, the funds had been diverted into the loss-making heavy-engineering and auto-making division, Texmaco Perkasa Engineering BV. This division was supposed to be the catalyst for a high-technology drive whereby Texmaco would become a regional force in the production of heavy trucks and sophisticated machinery.
Financing expansion in the late 1990s ran up debts of Rp942 billion to government banks. These and the other bad loans were later transferred to IBRA.
Texmaco has three other divisions – textiles, polyester, and steelmaking – which resulted from a reorganization following the IBRA deal.
Texmaco's ability to service its massive debt in the light of the default is plainly in question, but insiders at IBRA point out that the agency was always aware that Texmaco needed working capital to carry on with its operations.
"Due to higher raw-material costs, they [Texmaco] are finding it difficult to increase production," one source said. "But they are confident that if they can secure support from LCs [letters of credit], they can repay their debt." This implies that IBRA will bail the company out in one form or another.
Mirza Adityaswara, head of Research at Bahana Securities, expressed surprise at the default on such a relatively small amount and said: "Texmaco has been facing problems for some time, but this is the first time that BNI is barking."
This week, as if to prove the engineering group was not in the dire straits described by analysts, the group announced a completed export sale of 100 Perkasa buses to Saudi Arabia. The presence of Manpower Minister Jacob Nuwa Wea and Golkar Party leader Theo L Sambuaga at the handing-over ceremony in Subang speaks volumes. Not only is Sambuaga a commissioner of one of Texmaco's holding companies, he was manpower minister in Suharto's last cabinet.
Market analysts see the significance of this as being a precursor to Sinivasan playing the nationalist card again. Abdurrahman Wahid, president at the time of the restructuring deal, frequently defended Sinivasan and other indebted tycoons as exporters with valuable national assets that must be kept running for the benefit of the country.
Megawati Sukarnoputri's election to the presidency in July 2001 should have heralded doom for Sinivasan inasmuch as one of her closest advisors, Laksamana Sukardi, as state minister for state enterprises and IBRA chief, was widely expected to go after Sinivasan. On November 29, 1999, Sukardi, then Wahid's minister of state enterprises and investment, testified to the Indonesian parliament (DPR) that former president Suharto and Texmaco had engaged in "high-level collusion and conspiracy" to have a state bank extend credit to the conglomerate. Sukardi was referring to Texmaco's receipt of $276 million from Bank Negara Indonesia (BNI) under a government-approved export-assistance program aimed at increasing Indonesia's non-oil-and-gas export earnings. Bank Indonesia, the central bank, dished out pre-shipment facilities – credit for purchasing materials and to arrange financing for exports – instead of the standard post-shipment bridging loans.
In December 1997, a month after receiving the BNI credit, Texmaco, threatened with default on some of its foreign debt, asked for another $100 million to be deposited in BNI's Cayman Islands branch. Finally on December 29, Sinivasan asked Suharto for a 100 percent pre-shipment facility, saying the central-bank limit of 50 percent would cost the country jobs, and Suharto released a note of approval.
Sukardi tried his best and Sinivasan was even named as a suspect in the case, but pressure from politicians saw the case gradually disappear from the headlines.
An earlier order for 1,000 trucks by the Indonesian military had motivated Texmaco to finish off its main steelmaking and automobile plant in Subang, West Java, which it began building just before the 1997 Asian financial crisis battered the economy. The military had been offered trucks from South Korea but chose Texmaco's.
Under the deal signed with IBRA in May 2001, Texmaco pledged to hand over all its assets to a new holding company controlled by IBRA until the entire debt was repaid over 12 years. Significantly, unlike other agreements with debt-strapped conglomerates, the government allowed Sinivasan to continue to run the company.
The deal was slammed not only for leaving Sinivasan in control but also for allowing Texmaco too much time to pay back its debts. There was also criticism of the secrecy surrounding IBRA dealings with Texmaco. There were widespread allegations of collusion with government officials, and it was soon made public that IBRA watchdogs were only represented at the holding company level and held no sway within the conglomerate's units.
The IBRA deal with Texmaco remains outside of guidelines on debt restructuring drawn up in consultation with the World Bank and International Monetary Fund. The guidelines specifically forbid original shareholders in indebted companies under IBRA from playing a management role in the restructured company unless they are "cooperative and have sound integrity".
IBRA defends the non-adherence by saying the guidelines had not been followed by a decree.
IBRA has the leeway to liquidate Texmaco if it fails to keep up payments, but the group's greatly deteriorated asset base means that a selloff would not realize anywhere near enough to repay the debt. This is a dilemma that has faced IBRA for years – sell assets at a loss, or risk waiting for their value to rise.
Officials at IBRA have insisted for two years that Texmaco's debt accord isn't a bailout and that the memorandum of understanding signed with Texmaco gives them the power to liquidate unprofitable units.
Texmaco owes an additional $1.7 billion from debts in its operational units owed to mainly foreign bondholders that has yet to be restructured. About $700 million of that debt is secured against Texmaco's profitable polyester assets.
IBRA, for the government, is between a rock and a hard place. The dilemma of whether to pump more money into Texmaco in the hope of recovering most of its debts or opt for liquidation and face a big writedown is unlikely to be met by the latter choice.
This time around IBRA promises it will review transactions before they are made rather than the reverse, and Temenggung said IBRA would request that Sinivasan provide his own funds to support the working capital of the engineering unit.
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.
However, after a meeting of IBRA, BNI, Texmaco and the powerful Finance Sector Policy Committee (KKSK), the IBRA chief was forced to admit that his agency would pay the outstanding $29 million to BNI if Sinivasan was unable to pay immediately, though quickly adding that Sinivasan would have to provide collateral to an equal value.
IBRA's largest single debtor is a near certainty to outlive its major creditor. The agency is being terminated next year.