Five hedge funds are asking a New York State court to quash a ruling by a Jakarta district judge that precludes them from voting on Bakrie Telecom’s workout plans. Leading global institutional asset managers are watching the developments closely, as nearly 90% of Indonesian non-sovereign debt has been issued via offshore entities similar to that used by Bakrie Telecom.
Bakrie Telecom: Hedge funds’ notes issued by offshore SPV
Late last year, a Jakarta district judge ruled that the hedge funds, all based outside Indonesia, are not eligible to participate in the workout vote, as the notes they own were issued by an offshore special purpose vehicle. According to reports, the SPV subsequently lent the money to Bakrie Telecom.
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The funds own nearly 30% of the $380 million dollar-denominated 11.5% bond tranche due May 2015. The debt-laden Bakrie Telekom skipped coupon payments in November and September 2013 and started discussions with creditors last October.
The five hedge funds and one other bondholder are asking a New York court to quash a ruling by the Jakarta district judge. The suit claims that the current restructuring plan, if enacted, would leave them with less than 20 cents on the dollar.
According to the notes’ contract, the Bank of New York Mellon, the defaulted notes’ trustee, is representing bondholders in the restructuring. According to the Feb. 18 court document, the Bank of New York Mellon, as trustee, was excluded from the process, and executives of a company subsidiary named Bakrie Telecom voted on the plan in its place.
The document reveals the five hedge funds as: Universal Investment Advisory, Universal Absolute Return, Vaquero Master EM Credit Fund, Footbridge Capital and Growth Credit Fund.
Dispute could put Indonesia in a bad light
There are hardly any cases in which special purpose vehicle investors were precluded from voting in a restructuring, except in a case involving Vitro, a Mexico-based glass maker. In 2012, Vitro explored a loophole in the local law to allow executives from its subsidiaries to steer its debt workout in a similar manner to that of Bakrie Telecom, leaving holders of $1.2 billion of bonds with losses of over 40%.
Interestingly, the local ruling was challenged in the U.S. by hedge funds including Paul Singer’s Elliott Management, and a court decided the Mexican plan wasn’t worthy of enforcement.
Commenting on the Bakrie Telecom developments, Benjamin Cryer of Franklin Asia Credit Fund said, “We want to know how bondholders are treated everywhere we invest so we watch closely key bankruptcy rulings. Bondholders expect to be treated fairly in a restructuring and if they can just be excluded from the process, investors will at the very least require some additional safety in future issues.” He indicated that bond issuers may have to start offering additional assurance in writing that foreign creditor rights will be respected.
The dispute over Bakrie Telecom’s workout plan threatens to overshadow Indonesia’s position as the best-performing country this year in JP Morgan Chase’s Asia Credit Index series. The index’s returns total 5%. Moreover, President Joko Widodo can ill afford to irk foreign investors as he outlined plans to spur an economy that last year grew at the slowest pace since 2009.