IFR Asia, June 2010 – Equity capital markets special report

 The Indonesian Ministry of State-Owned Enterprises sent its top brass on the road in April with a presentation entitled: “Towards world class corporations.” The ministry showcased several of its key state-owned enterprises and told investors around Asia about the bright future they believe awaits this vast chunk of Indonesian commerce – 141 enterprises with Rp2,150 trillion in assets, or 38% of Indonesia’s GDP.

 Indonesia is trying a host of strategies to galvanize these enterprises: improving management and corporate governance, implementing stricter performance evaluation, restructuring companies into sector-based holding companies, closing or merging non-performers, and privatizing companies when they are ready. But in all of this process, nothing will be more closely watched than the long-awaited listing of Indonesia’s national airline, Garuda.

When it comes, it will be quite a milestone: Garuda has been trying to restructure itself and its debts on and off since the late 1990s. And in April, Parikesit Suprapto, Deputy Minister for State Owned Enterprises told IFR Asia and others in a presentation in Singapore that the listing of both Garuda and Krakatua Steel would take place “in the second part of this year. We are confident the two companies will be able to enjoy the same successful IPO as other SOEs that have been listed,” drawing particular attention to Bank Tabungan Negara (PTN), which completely a R1.98 trillion IPO in 2009, and Pembangunan Perumahan, which raised Rp582 billion in a January listing.

 Suprapto paints a picture of a business transformed. Revenues at Garuda have gone from Rp11 trillion in 2004 to Rp19.4 trillion in 2008; net income in that time has turned from a Rp810 billion loss to a Rp670 billion profit. Passenger yield is up by almost half since 2005 and on-time performance is improving. But most significantly, Suprapto insists Garuda has its debt program under control.  “The Garuda team has done a remarkable job,” he said in April, “reducing debt outstanding to approximately US$500 billion” (it stood at US$868 million in 2006) partly through a conversion of mandatory convertible bonds into a 10% equity stake in Garuda in December 2009.

 The Garuda Suprapto describes is an improving and wide-reaching airline ready for expansion: 28 domestic and 18 international destinations, with plans to increase total destinations to 68 by 2014; a four-star rating from Sky-trax; IOSA certification; and a commitment to fleet renewal and expansion with a significant reduction in average fleet life. “We believe Garuda is now well positioned for further expansion and is a suitable candidate for privatization,” he said.

 But since then, familiar delays and doubts have surfaced. In May Deputy Minister Mahmuddin Yasin, in the same ministry, warned the IPO – generally expected to raise around US$400 million in a 25-30% sale – could be delayed to 2011. A central point is the restructuring of a US$241.2 million debt with the European Credit Agency, although Yasin said in May he believed that was close to resolution. Without approval from that creditor, one of Garuda’s biggest, no IPO can realistically go ahead. Somewhat ironically for an airline, it is understood negotiations on that restructuring were delayed because the ministry and Garuda team couldn’t fly to Europe because of the volcanic cloud from Iceland.

 Consequently, IFR Asia understands that no RFPs have even been sent out yet, much less the appointment of an underwriter. When they do hit the road, they will have to convince investors that the restructured debt load – which is expected to be stretched out to 2016 – will remain serviceable. Other creditors include Singaporean holders of floating rate notes, and debts to state oil and gas operator Pertamina and state airport operators Angkasa Pura I and II.

 Relatively few state-owned companies are listed in Indonesia – just 16 – but they collectively accounted for 31.5% of the total market capitalization of the Indonesian Stock Exchange as of April 9 2010. Their total market cap in combination is Rp701 trillion, and they include four of the largest six companies in Indonesia by value: Telekomunikasi Indonesia, Bank Mandiri, Bank Rakyat Indonesia, and Perusahaan Gas Negara. State-owned entities command 51.4% of cellular telecommunications, 38.6% of bank assets and 44.7% of cement production. The listing of Garuda and Krakatua Steel would increase the significance of state-owned enterprises in the listed markets still further.

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