SECTION 1: Market overview
1.1 Please provide an overview of the cross-border financing market in your jurisdiction.
The Indonesian banking sector is dominated by state-owned banks and some private banks, such as BCA and CIMB Niaga. Among the state-owned banks, Bank Rakyat Indonesia has the most assets, followed by Bank Mandiri. Many foreign banks provide cross-border loans to Indonesian companies. Financing can be either bilateral or syndicated and can be used for a specific project in Indonesia, for the purchase of machinery (ECA) by an Indonesian borrower or as the working capital of the Indonesian borrower. Currently, our jurisdiction's role is still dominated by borrowing rather than lending.
1.2 What have been the key trends or developments in cross-border financing in your jurisdiction over the past 12 months?
As there are many infrastructure projects currently in process, much recent cross-border financing is related to these projects. This includes financing toll roads, power plants, smelters and a high-speed train. In 2016, the Financial Services Authority (Otoritas Jasa Keuangan – OJK), as the regulator of the banking and financial sector, started to regulate so fintech activities under regulations on peer-to-peer lending activities.
1.3 Have there been interesting changes in the structure of the banking sector in your jurisdiction?
There has been no significant interesting change in the structure of the banking sector in Indonesia. However, offshores financing provided by banks from Asian countries seems to be increasing. From a regulatory point of view, there has been increased focus on bank ownership, governance and compliance as well as on foreign workers in the banking industry.
SECTION 2: Financing structures
2.1 Briefly outline some recent notable transactions involving your jurisdiction, highlighting any interesting aspects in their structures and what they might mean for the market.
In the first quarter of 2017, a syndication of Japan Bank for International Corporation, Mizuho Bank, Sumitono Mitsui Banking Corporation, The Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Trust Bank, Mitsubishi UFJ Trust and Banking Corporation, The Norinchukin Bank and Singapore's Oversea-Chinese Banking Corporation extended a $4.3 billion loan to PT Bhumi Jati Power for the development of two 1,000MW coal-fired power plants located in Central Java Province, Indonesia. Upon its completion, the project will be one of the largest independent power producers (IPP) in Asia. Also, in the pipeline, there will be another syndication of offshore banks which will provide $1.74 billion of loan facilities to a project company for the development of a 1,000MW coal-fired power plant. These projects are very important to support the government's 3.5GW power project plan. These projects involve so many corporate and finance aspects, including the development of a complex 'self-help' remedy mechanism for the lenders that could set a precedent for similar projects in the future.
In March 2017, the Republic of Indonesia issued a global five-year sukuk worth $1 billion and a 10-year sukuk of $2 billion under Reg S/144A Trust Certificates due in 2022 and 2027, respectively (the Wakala Sukuk). The Wakala Sukuk are the largest ever non-GCC (Gulf Cooperation Council) US dollar sukuk transactions, and the largest US dollar sukuk issued by Indonesia.
2.2 Have there been any significant developments in the way cross-border financing transactions are structured or in the way borrowers and/or lenders are participating in the market?
There has been no significant development in the structuring of cross-border financing. As the Indonesia Stock Exchange composite index has been growing steadily, Indonesia's bond market has also grown over the past year, including Islamic finance. Indonesia's financing market can now be seen as a balanced combination of conventional financing and more diversified debt instruments.
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that govern cross-border financing in your jurisdiction.
The OJK is the regulatory agency that governs financing activities in Indonesia and Bank Indonesia, as the central bank, regulates payment systems and overseas macro-prudential aspects of the banking sector. There is no specific regulation on cross-border financing, except that Indonesian borrowers must comply with certain reporting requirements (and in some cases, obtain prior approval). These reporting requirements include reporting by Indonesian companies of their offshore plans and their implementation to Bank Indonesia. These companies must also comply with the prudential principle by applying the required hedging ratio, liquidity ratio and credit rating, unless they are eligible for a certain exemption. Certain reports must also be submitted to the Minister of Finance and the Offshore Commercial Loan Coordinating Team (PKLN Team).
3.2 Have there been any recent changes to regulations or regulators that may impact the cross-border financing market and what impact do you expect them to have?
The obligation to apply the prudential principle to offshore loans in foreign currencies came fully into effect in 2017, the latest development being the requirement that all hedging transactions be conducted with Indonesian banks, effective January 1 2017. Regulations on security interests and guarantees remain the same.
3.3 Are there any rules, legislation or policy frameworks under discussion that may impact lenders or borrowers involved in cross-border financing in your jurisdiction?
In 2017, the OJK plans to issue regulations on the management of conglomerate liquidity risks, conglomerate capital management and intragroup transactions. The OJK also plans to issue regulations on liquidity management and the prevention and management of a financial system crisis. Some regulations on Sharia banking and financing as well as fintech activities are expected to be issued as well. However, there is no certainty that these new regulations will in fact be issued this year.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions that exist about the financing market in your jurisdiction.
Regardless of a court case over this requirement, we see in the market that foreign lenders are still using the English language only as the language of most loan documentation. Since the enactment of the National Flag, Language, Emblem and Anthem Law (the Language Law) in 2009, many foreign lenders have signed their loan agreements in at least a bilingual English and Indonesian version. This trend became more pronounced in 2013 after the West Jakarta District Court declared a loan agreement signed in the English language only null and void. This decision was upheld by both the High and the Supreme Court. It is expected that this situation will not change until the implementing regulation of the Language Law, which may regulate any sanctions for failure to comply is issued.
Reporting obligations to Bank Indonesia and others must also be complied with because some courts have ruled that failure to report affects the validity of a loan agreement. Even if Indonesian law does not require judges to follow precedent, these rulings may be taken as an indication of Indonesian judges' view of certain matters.
4.2 Are there frequently asked questions or often overlooked areas from parties involved in cross-border financings in your jurisdiction?
Depending on their line of business, some companies in Indonesia may be required to obtain additional approval for their proposed offshore loan. For instance, for a power plant, if the project owner enters into a sale and purchase of power agreement (a PPA) with PT PLN (Persero) and wants to obtain an offshore loan, it must, regardless of the amount of the loan, obtain prior approval from the PKLN Team. Also, it is important to check the business licences of Indonesian borrowers, such as their Investment Coordinating Board (BKPM) approvals that state their loans as part of their investments, against the amount of the loan that they will obtain from the lenders.
Indonesia does not yet have a centralised data system that is accessible to the public regarding any dispute or case (including bankruptcy) involving a company. A manual search by submitting an application to each relevant court, under a power of attorney from the relevant company, is required for court searches.
4.3 Are there any classes of assets over which security cannot be taken or regulations specific to your jurisdiction governing the taking of security over certain classes of assets that lenders should be aware of?
In Indonesia, bank accounts cannot be secured by way of fiduciary security. In some cases, they are secured under a pledge, and it remains unclear whether this is an appropriate security interest for bank accounts. The establishment of security over aircraft is not clear either because there is, as yet, no formal and clear type of security recognised by the authorities that can be placed over an aircraft. In practice, the security interests are established over the machinery and equipment of the aircraft.
4.4 What measures should be taken to best prepare for your market idiosyncrasies?
As it is now possible to access the Ministry of Law and Human Rights online system to check certain corporate information, such as listed shareholders, the members of the board of directors and the board of commissioners and the latest company deed etc., it is advisable to conduct a search to obtain preliminary information about an Indonesian borrower. Based on the information, lenders can then ask for the complete set of the Articles of Association of a company to find out if there is any limitation on the board of directors' authority to obtain loans or establish security over the company's assets.
For taking security over plots of land, the lender should consider checking the status of the land at the relevant Land Office. This requires a power of attorney from the borrower or the landowner.
Lenders should also check the borrower's business licences and approvals, such as its BKPM approvals, to check the permitted loan amount. If the permitted loan amount does not correspond to the loan amount to be obtained by the company, the company should amend the relevant approval to change the loan amount.
SECTION 5: Practical considerations
5.1 Briefly explain the downstream, upstream and cross-stream guarantees available in your jurisdiction, with reference to any specific restrictions or limitations.
In Indonesia, the types of security usually used for financing are the following:
a) fiduciary security: usually established over receivables, insurance proceeds, inventory, machinery and equipment and/or immovable assets that cannot be secured by security rights;
b) security rights over land (Hak Tanggungan): which can be established over plots of land and assets attached to the land;
c) pledges; usually established over shares;
d) corporate guarantees and/or personal guarantees.
Contracts cannot be an object of security. Most commonly, they are 'secured' under a conditional assignment agreement by the lender and the borrower and acknowledged by the counterparty.
Shares can be secured by either a pledge or a fiduciary security. However, since fiduciary security must be registered with the Fiduciary Registration Office where the grantor is domiciled, fiduciary security over shares owned by foreign parties cannot be registered and therefore, established. In this situation, the shares can be secured under a pledge.
If the security granted to the creditors involves assets that constitute more than 50% of the net assets of the company in one or more transactions (whether related or unrelated transactions which cumulatively constitute more than 50% of net assets), then that action requires approval from a general meeting of shareholders of the company.
In Indonesia, to provide guarantees or security for another party's debt, a corporate benefit should exist. Actions which do not clearly show a corporate benefit for the company may be difficult to enforce.
5.2 Are there any specific issues creditors should be mindful of regarding a bankruptcy and restructuring situation?
Under the Indonesia Bankruptcy Law, two types of proceedings may be commenced: bankruptcy proceedings, whereby the borrower will lose its power to manage and dispose of its assets; and a legal debt moratorium or suspension of payment proceedings, whereby the borrower, at the request of the lender or the borrower itself, is given temporary relief to restructure its debts and continue doing business, and ultimately to satisfy its obligation to its creditors.
All the procedures for these types of proceedings must be completed within a certain timeline and cannot be avoided and the lenders should be careful about the timing issues. A petition for bankruptcy also has two requirements: the borrower must have more than one lender and must have failed to settle in full one of its debts, which must be due and payable. In addition, the bankruptcy/suspension of payment petition can be granted if there are facts and circumstances that can be simply proven.
Since the proceedings will involve other creditors, it is important that all the creditors communicate and remain on good terms and cooperate with each other.
5.3 Do foreign debt quotas apply in your jurisdiction and is offshore financing to domestic entities monitored?
No foreign debt quotas apply. However, the licences and permits of a foreign investment company, such as its BKPM approval and the approval from the PKLN team, may set out the total amount of loans the company may have. BKPM has been imposing a policy that requires foreign investment companies to limit their debt-to-equity ratio to the ratio stated in their BKPM approval. The debt-to-equity (paid up capital) ratio imposed by BKPM depends on the company's line of business, but is usually 3:1. Certain lines of business, such as power companies, may obtain a higher ratio, such as 10:1 or 15:1.
5.4 Describe your jurisdiction's relationship with non-performing loans (NPLs), including volume of outstanding NPLs and techniques/challenges in managing them.
According to the Indonesia Banking Statistics issued by the OJK in March 2017, the NPL ratio has increased since 2014. According to the report, the gross NPL in 2014 was 2.16%, while as of March 2017, the gross NPL was 3.04%. NPLs are usually managed by restructuring the loans.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for cross-border financing in your jurisdiction? How do you expect legal practice to respond?
Indonesia still requires significant further infrastructure investment. Therefore, the trend in financing will likely remain in infrastructure projects. Asian banks from China, Japan and Korea will be increasingly active in cross-border financing activities in Indonesia.
|About the author|
Maria H Sagrado
Maria Sagrado has extensive high-level experience in structuring foreign investment and financial transactions. She represents the interests of numerous foreign clients investing in Indonesia, including companies and investors from the China, the US, the UK, Singapore and the European Union across a wide range of sectors, including power plants, pharmaceuticals, plantations, distribution, department stores, mining and other business areas. Combining her European and Indonesian exposure, Sagrado's well-rounded experience in relevant corporate and commercial practices enables her to comprehensively advise and guide foreign clients on local investments or transactions in Indonesia, with due consideration of the various aspects involved.
Sagrado's ability to forge a rapport between disparate parties and drive solutions is also showcased by her successful track record executing prominent finance transactions involving leading foreign banks, in particular banks from China, Germany, Malaysia and other European countries, as well as offshore export credit agencies (such as Sinosure, Euler Hermes, SACE, OeKB) in the financing of Indonesian borrowers including state-owned enterprises (SOEs), power plants, major mining related industries and manufacturing companies.
|About the author|
Hanny Marpaung works on a broad range of capital markets matters. She has extensive experience in structuring transactions; conducting legal research and due diligence; preparing legal opinions; drafting and reviewing transaction documents; and other matters related to initial public offerings, rights issues, bond issuances, tender offers, acquisition and corporate actions conducted by public as well as private companies. Marpaung has an extensive experience in the corporate and commercial and financial services area and has been involved in a wide range of significant transactions involving both domestic and international corporations. She is also experienced in mergers and acquisitions, joint-ventures and advising clients ranging from business start-ups to seasoned companies.