Indorama Risk Management Facility

completed

The CompanyPT. Indorama Synthetics Tbk is a successful, export-oriented, internationally competitive manufacturer of polyester filament and spun yarns, polyester fabric and bottle grade PET resin. IFC has made several loans to Indorama and is the second largest shareholder in the company. Indorama has three main operating divisions:1. Spinning Division - It produces different types and blends of polyester yarns, as well as viscose and acrylic yarns;2. Polyester Division - It includes fibre, yarns (filament and draw-texturized yarns) and PET resin production operations; and3. Fabrics Division - It is a relatively small division that accounts for less than 10% of total revenues. The operations focus on value-added products, both grey fabrics (i.e. unprinted fabrics) and printed fabrics.In 1999, the company produced about 148,000 tons of polyester filament yarn and polyester staple fiber, 31,000 tons of spun yarn, 76,000 tons of PET resin and 22 million meters of grey fabrics. Production levels were consistently equal to, or above, rated capacity for all major production units. The company is a proven exporter and, in 1999, generated over 60% of its revenues via exports principally to Europe, United States, Australia and the Middle East. Indorama has been able to consistently generate operating profits and robust cash flows even through the Asian economic crisis and the adverse economic conditions in Indonesia, which is reflective of its strong operating fundamentals. The company is also current on all its debt obligations. Based on its historical cash flows, liquidity position, and improving debt service coverage, the company appears to be strong from a credit quality perspective. However, with the bunching of debt repayments in the future, the company may face potential difficulties in servicing its debt obligations from internal cash flows. Recognizing this potential problem, Indorama proposes to issue a 5-year bond and refinance some of its existing debt. This would strengthen its future financial position as its future debt service obligations will better match its cash flows. The ProjectIndorama plans to issue an IDR 1 trillion, 5-year bond in early 2001. The proceeds of the bond issue will be used to (i) prepay, in 2001, the net US$80 million bullet payment, due in March 2002, under the syndicated loan arranged by Deutsche Morgan Grenfell (DMG Loan), and (ii) strengthen the company’s working capital needs. The proposed bond issue would strengthen the company’s future financial position, as its future debt service obligations will be rescheduled to better match its cash flows. As an export-oriented company with more than 60% of its revenues in US$, Indorama received an approval from BAPEPAM (the Indonesian securities and exchange authority) to report its financial statement in US$. Historically, Indorama has maintained its assets and liabilities in US$ to avoid any currency mismatches. Therefore, in line with its past practice, Indorama intends to swap the IDR bond proceeds into US$ at the prevailing exchange rate. Based on Indorama’s request, IFC is considering assisting the company in structuring and arranging the aforementioned swap.IFC Role Assist Indonesian Corporate: IFC’s strategy in Indonesia focuses on assisting internationally competitive domestic companies to recover from the crisis. This involves assisting IFC’s portfolio companies through financial restructuring and, where appropriate, providing additional working capital, long-term funding as well as other financial instruments to maintain necessary balance sheet flexibility and diversify available sources of funding. IFC’s endorsement of both existing and new projects should signal to other investors IFC’s continuing confidence in the long-term prospects of the Indonesian economy. Promotion of Risk Management Product: Although clients usually swap IDR payments for US$ payments, this transaction provides the reverse -- it swaps US$ payments for IDR payments as the Company has dollarized accounts. However, the broad implications of this transaction -- a first for IFC in Indonesia -- will serve as an example of how corporations can manage currency mismatches on their balance sheet and thereby reduce overall risks. Although the Indonesian corporates are seeking such risk management products, they are unable to obtain such products on a cost-effective basis.This ia due to the resistance from swap counterparties to enter into long-term contracts as a result of the high country risk associated with Indonesia. IFC''s intimate knowledge of Indorama''s performance allows us to be comfortable with the credit risk and intermediating swap, thereby allowing Indorama to manage its balance sheet risks in a cost-effective manner. Development Impact:IFC’s investment at this time will have two significant demonstration effects in the decimated Indonesian corporate scene: (i) IFC''s assistance in arranging the swap will send a positive signal to international investors and restore some of the confidence in the Indonesian private sector severely undermined by the Asian economic crisis; and (ii) IFC''s support to Indorama will demonstrate that, in an environment where a majority of companies are not current on their debt service and where implementation of debt restructuring is slow, borrowers who meet their obligations will gain support from the lending community. Furthermore, the introduction, through this project, of a risk management tool for use by Indonesian corporates would be an example of how companies could manage balance sheet exposures to currency mismatches and prevent adverse exposures to currency volatilities.