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Indonesia corruption crackdown adds to strains on junk bonds

[SINGAPORE] A bribery probe at major Indonesian developer PT Lippo Karawaci has prompted investors to ask if more companies might get caught in the government's anti-corruption campaign.

That's adding to broader strains on the nation's junk bonds, which have already been hit harder than Asian peers in the recent emerging-market sell-off as the rupiah tanks. The timing couldn't be worse, as funding costs are rising ahead of a wall of maturing debt that must be refinanced in coming years.

"There could be broader implications as it brings the question over corporate governance into focus again," said Charles Macgregor, head of emerging markets at Lucror Analytics Pte in Singapore. "Indonesian companies rate poorly on this scale. The government's push to crack down on corruption may unearth other cases."

Indonesian dollar junk bonds have lost 6 per cent this year, compared with the average 2.8 per cent decline for all notes in the ICE BofAML Asia high-yield index. For Lippo Karawaci dollar bonds, the damage has surpassed 25 percent.

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Indonesia is not the only country where credit investors have been rocked by such investigations in recent years. A default by Chinese developer Kaisa Group Holdings Ltd in 2015 stemmed from a probe. And noteholders of Petrobras suffered losses after prosecutors exposed a money-laundering scheme involving the Brazilian state oil company in 2014.

The home of Lippo Group's deputy chairman James Riady was searched on Wednesday by anti-graft officials, following the detention of the Lippo Group director and another employee.

Lippo Karawaci faces liquidity and cash-flow issues over the next 12 months amid the probe, S&P Global Ratings said on Wednesday.

The Riady family, which controls the Lippo group, has had to rejig its business empire with asset sales. Most of Lippo Karawaci's holding company debt is in US dollars, while operating cash flows are in rupiah, S&P said. Indonesia's currency fell to a 20-year low of 15,284 per dollar last week.

Lippo Karawaci is one of four other Indonesian companies which have significant currency mismatches on their borrowings, Moody's said in a June report. Its foreign-currency hedges offer no protection with the rupiah past 15,000, Moody's said then.

The bribery accusations "further add to the woes of the company, which is already reeling from cash flow issues, liquidity pressure and currency exposure," R Lakshmanan, a senior research analyst at CreditSights, said in a report on Tuesday.

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