Indonesia may be unfairly tarred by Bumi’s brush

October 4, 2012

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bumi Resources is not a metaphor for Indonesia. The heavily indebted coal miner, currently at the centre of a financial probe and corporate governance spat, has said it may have to sell assets or shares. With coal prices weak, the drama at Bumi Resources spells more trouble for creditors and shareholders, including those of its London-listed parent. Indonesia must hope it is not unfairly tarred by the association.

Bumi Resources is famous in Indonesia as the company with the richest coal mines, but whose former controlling shareholders, the powerful Bakrie family, left it buried in debt. The latest twist in the saga comes from an unidentified whistleblower who has flagged at least $500 million in questionable assets. With coal prices already falling, that’s cast a further pall over the company’s prospects.

On paper, Bumi Resources seems to have enough cash coming in to stay solvent. But with net debt at 8 times equity and doubts swirling about its other assets, refinancing the roughly $1 billion of debt Standard & Poor’s estimates will mature over the next year could be a tall order. Bond markets suggest Bumi would currently have to pay an interest rate of at least 20 percent a year for 5-year money.

That isn’t good news for shareholders of Bumi Resources or those of Bumi PLC, the London-listed company that owns a 29 percent stake. The more than 80 percent drop in Bumi PLC’s shares in the past year has already forced the Bakrie family to renegotiate a $437 million loan backed by its stake in the company. It’s also likely to frustrate Bumi PLC chairman Samin Tan, who bought his 23.8 percent stake in the London-listed company from the Bakries in January — as well as Standard Chartered, which lent him the $1 billion to buy it.

The danger for Indonesia is that the Bumi saga may be seen as a cautionary tale for prospective investors in the country. Yet such white-knuckle debt levels are rare: if anything, Indonesian companies are borrowing too little. The average net debt to equity at Indonesian companies covered by Citigroup is just 12.7 percent. Indonesia has no shortage of investment perils, including poor corporate governance. But investors should avoid tarring it with Bumi’s brush.



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I totally disagree, and smiled when I saw that the writer’s opinion is totally based on a Citicorp debt to equity statistic, and while the statistic may indicate that Indonesian corporate are borrowing to little, I would be very hesitant to reach this conclusion without an understanding of how financings are typically completed “on the ground” in Indonesia.

Most business people knowledgeable about transacting and financing in Indonesia, would probably be aware that most Indonesian lenders, lend based on asset value. “Independent expert consultants” retained by the lenders often verify these “asset values”. It is common knowledge amongst businessmen and bank loan underwriters here that the “asset value” shown to a lender can be influenced, if the right incentives are placed on the table. As a result I would suggest that reported “asset values” used in debt level calculations tend to be very unreliable and are open to corruption. It is not unusual, to hear from investment bankers and local business owners, who understand how local financing works , that many business/project owners are “laughing all the way to the bank” after a successfully completed financing, because they were in effect able to get over 100% financing.

The Bumi problems are asymptomatic of the corruption that is endemic in the legal and government system in Indonesia and I believe that the Bumi problems are a precursor to many other problems the economy will face when the next economic/fx shock forces all those investors, banks, and credit rating agencies that have been painting such a rosy picture about the Indonesian economy (based on questionable ratios and statistics that western analysts typically take for granted as reliable indicators), wonder what went wrong. I don’t think I am being an unreasonable pessimist here but I do have a “de ja vu” feeling that we are about to see a repeat of 1998. I believe others do as well based on recent statements by Indonesian government officials, 09/20/private-sector-warned-over-rising- foreign-borrowing.html .
On a side note, I would be curious as to what exactly has incented the writer to express this opinion, as it is unusual to see someone rise up to defend an emerging market economy.

Posted by IndoAdvisor | Report as abusive

“On a side note, I would be curious as to what exactly has incented the writer to express this opinion, as it is unusual to see someone rise up to defend an emerging market economy.”

Could it be because the article is correct and the man that is ultimately responsible for the Bumi PLC fiasco is also pushing to be on the presidential ballot in 2014?

Posted by Rob-in-Jakarta | Report as abusive