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PT Bank Mandiri, the country’s largest lender, will take an 11 percent stake in flagship carrier PT Garuda Indonesia under a debt-to-equity conversion agreed to by all parties involved, including the central bank, the State Enterprises Ministry said on Friday.

Under the plan, Mandiri will convert $100 million of the state-owned carrier’s bond debt into equity, the ministry said.

“It’s done,” State Enterprises Minister Sofyan Djalil said. “All parties have in principle agreed to convert Garuda’s bonds held by Mandiri into equity in the company. Only the details and technical matters need to be worked out now.”

Sofyan said the deal could be concluded before Garuda’s planned initial public offering, scheduled for the middle of next year.

He said Bank Mandiri would be required to outline a time frame for selling its shares in Garuda.

The agreement ends months of negotiations between Garuda, Bank Mandiri, the State Enterprises Ministry and Bank Indonesia, the central bank.

The conversion of Garuda’s debt into equity will mark the first time a commercial bank has been allowed to convert the debt of non-banking companies into equity since the practice was outlawed by the central bank in the late 1990s.

The deal will also help pave the way for the airline’s long-delayed initial public offering, most recently rescheduled until June 2010.

All of the Garuda’s debt, about $800 million in total, is being restructured this year.

“We are currently in the documentation process with our debtors, including Bank Mandiri,” said Eddy Porwanto, Garuda’s chief financial officer.

“This means that we are talking about details to be put in the contract. We estimate [the contract] will be finalized by the end of the third quarter.”

In 2001, Garuda restructured $100 million in debt owed to Bank Mandiri over a period of five years, with the debt maturing in 2006 through a mandatory convertible bond scheme.

However, Bank Mandiri turned down an offer to convert Garuda’s bonds into shares in 2006 because the airline was unprofitable.

Bank Mandiri said it was concerned its shareholders would suffer if the option were exercised. The debt was then extended until 2008.