Leah Harrison, Jakarta – Indonesia may be more deeply mired than any other country in Asia's debt and currency crisis, but it's not too early for vultures.
Investors are swooping down on the country of more than 13,700 islands strewn across the equator between Singapore and Australia to pluck bargains from the rubble.
U.S. investment banks, including Bear Stearns Cos., Bankers Trust New York Corp. and Merrill Lynch & Co., are circling, looking to buy distressed debt or piggy-back on other vulture funds. Foreign firms – from the Hong Kong-based Jardine group's Dairy Farm International Holdings to the Netherlands' Royal Nutricia NV – are buying up chunks of Indonesia's best companies, betting the world's fourth most-populous nation – with more than 200 million people – will eventually emerge from its financial crisis.
"It's a case of separating the quick from the dead," said Simon Neville, Dairy Farm's treasurer. "In the longer term the fundamentals of Indonesia will come good."
That's not so obvious right now, though. The rupiah has lost three quarters of its value – about 8,000 to the dollar today from 2,400 a year ago – leaving most companies on the Jakarta Stock Exchange technically insolvent. Companies have about $80 billion in foreign debt, and as repayment costs have surged four-fold, most have simply stopped paying.
Still, for the patient there could be big money to be made. "My benchmark exit is to make three times my money," said Ascanio Martinotti, managing director of private equity for Regent Pacific Group Ltd.
Earlier this year, Hong Kong-based Regent, which manages $2.5 billion, paid $7 million for 350 new, unoccupied apartments in central Jakarta, taking them off the hands of a cash-strapped developer. The flats, from middle-level to luxury properties, were bought at between $200 to $1,000 a square meter. Less than a year ago, comparable apartments sold for $1,000 to $3,000 a square meter, Martinotti said.
Risky business
Granted, investing in Indonesia is risky business. The financial meltdown has left the stock exchange in tatters – the benchmark index has plunged 77 percent in dollar terms in a year, the world's worst performance. Its capitalization has shrunk to just $20 billion today from $95 billion a year ago.
Shares of many of the country's largest companies are trading at just a fraction of their pre-crisis levels. For example, PT Matahari Putra Prima, the country's biggest department store operator, now trades at 425 rupiah a share, less than one-quarter of its 52-week high of 1800. The company has about $200 million in debt.
The country's economy is not expected to turn around anytime soon. Inflation reached a 23-year high of 39 percent in March. An expected recession this year – the first in almost three decades – has triggered food riots, student protests and calls for the 32-year rule of President Suharto to end.
"The political risks in Indonesia are the highest of anywhere in Asia," said Bruce Gale, regional manager at Political and Economic Risk Consultancy, which gives advice to companies investing in Asia.
Still, the promise of a bargain and eventual high returns is attracting some brave investors. In January, a unit of Royal Nutricia, Europe's biggest baby food maker, offered to pay 328.9 billion rupiah ($41 million) for half of Indonesia's biggest baby food maker, PT Sari Husada. The prospect of a bargain price also lured food retailer Dairy Farm. On Feb. 17, Dairy Farm said it will pay $36.4 million for a 31.18 percent stake in PT Hero Supermarkets – Indonesia's biggest food store operator.
Even bigger money may be moving in. General Electric Co. of the U.S. plans to invest $40 billion in Asia in the next four years, taking advantage of the region's financial crisis to pursue low-cost acquisitions and alliances
No weak knees
Regent has raised about $100 million for a series of Asian Opportunities Funds, and hopes to pull together a total of $500 million by the end of the year. It plans to invest 40 percent of that money in Indonesia, where Martinotti expects returns will be biggest in Asia because any recovery in the bombed-out currency will help boost results in U.S. dollar terms.
Some investors are looking to buy debt that banks want to unload. In the end, creditors may get just 30 to 60 cents on the dollar for the troubled debt, analysts and fund manager say. In other cases, financial investors are looking to buy debt and then swap it for equity. Regent's Martinotti says many Indonesian companies are so far in the hole, they may have no choice: "Your equity has been wiped out. I'll buy your debt, and I'm the owner."
Cash-rich companies from neighboring Singapore have been among the most aggressive buyers. Singapore Power Ltd., the island-state's electricity monopoly, said Jan. 6 it would pay $175 million for control of certain power assets of Asia Pulp and Paper Co. on the island of Java. The seller, Indonesia's biggest paper maker, is saddled with about $4 billion in debt.
For sale
There are plenty of assets to choose from. Many of Indonesia's biggest companies overreached in the bubble years of 7 percent annual economic growth, diversifying into far-flung businesses – such as golf-course development – which they now must shed.
PT Anwar Sierad, a chicken and feed producer which is trying to negotiate a rollover of its $275 million in debt, is looking for a buyer for its Wendy's Hamburgers franchises in Indonesia.
At least seven prime office blocks in central Jakarta worth $270 million are for sale by developers desperate for cash, the Bisnis Indonesia newspaper reported Feb. 3.
Many construction sites have simply been abandoned after interest rates surged to a 10-year high last year. Rates have been raised twice in the last month, with the benchmark 1-month government bill at a record 50 percent. That should keep Indonesia's troubled companies looking for buyers.