Why is Sukanto Tanoto laughing?

Increased loan repayments to Bank Mandiri bring a smile to Indonesia's richest citizen.
Swinging through Hong Kong this week, IndonesiaÆs freshly crowned richest citizen denied that his new status had pressured him to substantially increase the repayment of principal and interest on one of the biggest loans restructured following the 1997 Asian financial crisis.

ôItÆs not the case that having been described (as IndonesiaÆs richest man) by a leading international magazine, that I then felt under pressure to step up payments,ö says the pulp and paper mill magnate with a smile. ôWe have been talking to Bank Mandiri for a while now and in fact we were ready to make an announcement a while ago.ö

The background to the case is that during the go-go 1990s, Sukanto TanotoÆs RGM Group organised credit facilities of $1 billion for the 'April' mill (known as the Riau Complex loan after the town where construction was underway), which was slated to be one of the biggest pulp and paper mills in the world.

The RGM Group acts as a æmanagement officeÆ for TanotoÆs companies, but has no direct stake in April, which is majority owned by Tanoto himself, as is RGM.

The loan came from a number of domestic banks. These banks came under intense pressure during the crisis and were eventually forced to merge into one entity, Bank Mandiri, in many cases after cutting off all funding to their clients.

Almost 10 years later, the profitability situation in Indonesia is very different, with commodities companies such as RGM booming on the back of soaring worldwide demand for commodities and greatly increasing their capacity to repay loans. The just-announced improved repayment schedule exceeds what Bank Mandiri was expecting, adds Tanoto, and is a major improvement on the terms agreed in 2002.

Under the re-negotiated agreement, the combined interest and principal payments have increased from $61 million to $140 million per year, while the tenor has been extended from 2010 to 2016. Tanoto emphasised that there was no question of creditors getting a haircut on either the principal or the interest.

ôWe are wholly honouring our restructuring agreement, and our creditors are definitely not getting less than agreed in 2002,ö he says. Tanoto would not be drawn on whether the improved terms were due to a need to æclear the decksÆ for further capital. ôWe have been growing very fast in any case,ö he says.

Specialists close to the case say that the new agreement would have been publicised much earlier, only Bank Mandiri was reluctant until recently to confirm that no haircut was involved in the rescheduling. In fact, a haircut could almost have been forgivable given that the cost of the original US dollar-denominated loan exploded in rupiah terms during the crisis because of the collapse of the Indonesia currency.

The company says that that around an extra $510 million was added to the repayment costs after the creditor banks asked in 1998 that the debtor pay them back in dollars, at a rate of 11,500 rupiah to the dollar, the average exchange rate of that year. Two years later, the banks required that the loan be converted back to rupiah at 7,700 to the dollar. All the foreign exchange losses were born by the debtor.

Tanoto notes that even existing and approved bank credits could not be drawn down in the panic induced by the crisis. ôAnd letters of credit from Indonesia were considered worthless at the time and could not be cashed,ö he recalls.

Tanoto also points out that he himself had invested $600 million in equity into the April mill, which was in jeopardy after his creditors closed their doors. Eventually, assets to finance the investment were sold in China, and Tanoto says he repatriated almost $1 billion to Indonesia at a time when everybody was fleeing the country.

ôIt was a big personal bet by me on the future of my country,ö he says.

He was not alone. Vulture funds and investment banks such as Credit Suisse, active in the aftermath of the crisis, have reportedly snapped up much of his paper at rock-bottom prices. With the recovery of the Indonesian economy, the value of this paper has rocketed.

ôIf investors kept the faith, they ended up making lots of money. If they cut and run, they didnÆt,ö he concludes.

Indonesian tycoons have not been especially popular as a breed amongst investors, but observers are increasingly re-evaluating the Asian corporate catastrophes of 1997/8 as the result of a perfect storm of rising rates, collapsing currencies and liquidity crunch, rather than always being the result of corruption which was the most common explanation at the time.
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