Janeman Latul& Ardian Wibisono

A Garuda airliner waits at Jakarta's Soekarno-Hatta Airport. (JG Photo)

Mandiri May Convert Garuda Bonds Into 11% Stake in Indonesian Carrier

PT Bank Mandiri is considering a plan to convert about $100 million of existing mandatory convertible PT Garuda Indonesia bonds to an 11 percent stake in the company this quarter, bank officials said on Monday.

The Indonesian flag carrier Garuda is in the process of finalizing its debt-restructuring plan with the country’s largest lender after months of negotiations.

If things go as planned, the conversion of the debt would be the first time a bank was allowed to hold shares in other companies since the central bank passed a law in the late nineties barring commercial banks from doing so. It would also pave the way for the airline’s much delayed plan to go public, most recently put off until 2010.

“Garuda’s debt restructuring is almost complete,” said Sofyan Djalil, the state minister for state enterprises. “The option is the most profitable for both parties. It’s an MCB [mandatory convertible bond].”

The deal had not been signed yet because “minor details needed to be worked out regarding the bank’s ownership in a company,” Sofyan said, with the central bank already approached for approval.

Eddy Porwanto, Garuda’s chief financial officer, told the Jakarta Globe that if the MCB was executed this quarter, Mandiri would hold about 11 percent of Garuda’s shares.

“We are currently in the documentation process with our debtors, including Mandiri,” Eddy said. “This means that we are talking about details to be put in the contract. We estimate that [the contract] will be finalized by the third quarter.”

When asked whether the Garuda-Mandiri deal would be an exception to the current Bank Indonesia regulation, Agus Martowardojo, Mandiri’s president director said, “It will probably be like that.”

The progress of the negotiations was good, he said. “We have taken the issue to the central bank and it looks promising.”

Mandatory convertible bonds have a conversion or redemption feature that requires the holder to convert them into the underlying common stock.

In 2001, Garuda restructured its $100 million of outstanding debt to Mandiri over a period of five years, with the debt maturing in 2006 in an MCB scheme. However, in 2006, when Garuda offered Mandiri the opportunity to convert its loans into shares, the bank turned down the offer because the airline was unprofitable.

Mandiri was concerned that if the option was exercised, its shareholders would suffer. The debt was then extended until 2008.

Finalization of Garuda’s debt to Mandiri is vital if the company goes public. All of the carrier’s debt of about $800 million is being restructured this year.

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