1.1 What are the main trends/significant developments in the lending markets in your jurisdiction? Prudential Principles for Non-Banks
Recently, Bank Indonesia ("BI") enacted BI Regulation No. 16/21/ PBI/2014 dated 28 October 2014 concerning the Implementation of Prudential Principles for the Management of Offshore Loans of Non- Bank Corporations ("NBCs") ("Regulation 16"), which replaces BI Regulation No. 16/20/PBI/2014 with the same subject. Regulation 16, which came into force as of 1 January 2015, aims to mitigate various risks inherent to private external debt, specifically for non-bank corporations. In principle, Regulation 16 requires NBCs with offshore loans (except for trade credit) to implement prudential principles by satisfying certain obligations to meet prescribed hedging ratios, liquidity ratios, and credit ratings, as follows:
- Hedging Requirement. Each NBC must effectuate a minimum hedging ratio of 25% of the combined negative spread between its Foreign Exchange Assets and its Foreign Exchange Liabilities which will be due (i) within three months after the end of the relevant quarter, and (ii) between the fourth and the sixth month after the end of the relevant quarter. The hedging ratio must be realised by hedging the foreign exchange against the Rupiah by taking out derivative coverage in the form of a forward, a swap and/or an option. During the first year after effectiveness (until 31 December 2016), a reduced minimum hedging ratio of 20% would apply.
- Liquidity Ratio. The NBC must meet a minimum liquidity ratio of 70%, calculated by dividing the total value of Foreign Exchange Assets that is available up to three months after the end of the last quarter by the amount of Foreign Exchange Liabilities that are due up to three months after the end of the most recent quarter. Receivables derived from forwards, swaps, and/or options which will be closed up to three months after the end of the most recent quarter may be included in the calculation. During the first year after effectiveness (until 31 December 2015), a reduced minimum liquidity ratio of 50% would apply.
- Credit Rating. The NBC must have a credit rating (either an issuer credit rating or a debt credit rating) of at least BB- (or equivalent) issued by an authorised Rating Agency (including, amongst others, Fitch Ratings, Moody's Investor Service and Standard and Poor's). The rating may not be older than two years. The rating must be a long-term debt rating if the NBC wishes to issue long-term bonds. The credit rating requirement is not applicable to offshore debt in foreign exchange ("FX Offshore Loan") obtained (i) for the purposes of refinancing (i.e. without increase of principal), or (ii) from international institutional credit providers (bilateral or multilateral) in relation to infrastructure projects (including infrastructure in the fields of transportation, roads, irrigation, drinking water, sanitation, telecommunication and informatics, electricity, and oil and gas). Institutions that are specifically mentioned in Regulation 16 are International Finance Corporation (IFC), Japan Bank for International Cooperation (JBIC), Japan International Cooperation Agency (JICA), Asian Development Bank (ADB) and Islamic Development Bank (IDB). The Credit Rating requirement would be applicable on the FX Offshore Loan that is signed or issued as of 1 January 2016.
On 6 March 2015, Bank Indonesia issued Bank Indonesia Circular Letters No. 17/3/DSta on the Reporting of Prudential Principles Implementation Activities in Managing Foreign Debt of Non-Bank Corporations to implement Regulation 16 ("Circular 17"); Circular 17 was further amended by Bank Indonesia Circular Letters No. 17/24/DSta dated 12 October 2015.
1.2 What are some significant lending transactions that have taken place in your jurisdiction in recent years?
As the largest issuer of bonds, the Government of Indonesia regularly taps the local market to finance the state budget. The Indonesian Government bond forms vary from conventional and retail government bonds to government sukuk in several tenors. Municipal bonds are issued by the province or district government for financing public utilities projects.
Although both government and corporate bonds are listed on the Indonesia Stock Exchange ("IDX"), they are mostly traded over-the- counter ("OTC"). BI also issues short-term bank certificates known as Certificates of the Central Bank.
The last issuance of Indonesian government bonds was in 2015, amounting to USD 30,000,000,000. The global medium-term notes were priced at 99.393% with a coupon and yield of 4.125% and 4.200% respectively for the 10-year tranche, and at 98.867% with a coupon and yield of 5.125% and 5.200% respectively for the 30-year tranche. The maturity dates are 15 January 2025 and 15 January 2045, respectively. There continues to be a trend of high demand for the offering among investors for the short-term international market.
2.1 Can a company guarantee borrowings of one or more other members of its corporate group (see below for questions relating to fraudulent transfer/financial assistance)?
Yes, a company guarantee is commonly acceptable in financing practice.
2.2 Are there enforceability or other concerns (such as director liability) if only a disproportionately small (or no) benefit to the guaranteeing/securing company can be shown?
Under Indonesian law, the validity of a legal act performed by an Indonesian company may be contested for want of a corporate benefit. Furthermore, under Indonesian law, there is uncertainty as to whether the issuance of a guarantee or a third party security or a stipulation in an agreement for the benefit of third parties by a company in order to secure the fulfilment of obligations of a third party is or can be regarded to be in the furtherance of the objects of that company (the "Ultra Vires Doctrine"), and consequently, whether such guarantee or third party security may be voidable or unenforceable under the laws of the Republic of Indonesia. In determining whether the issuance of a guarantee and third party security is in furtherance of the objects of a company, it is important to take into account the provisions of the articles of association of that company and whether that company derives certain commercial benefit from the transaction in respect of which the guarantee and third party security is issued.
Based on the Ultra Vires Doctrine, validity or enforceability can in principle only be challenged by that company itself, i.e. arguably through (a) the shareholders of that company, (b) the board of directors of that company, (c) the board of commissioners of that company, or (d) by a receiver in the event of bankruptcy. By obtaining the written consent of all of the shareholders, board of directors and board of commissioners of the relevant company authorising that company to enter into a guarantee and third party security for the benefit of the company for whose benefit it creates such guarantee or third party security and confirming that such transaction is in the interests of that company, those parties should not be able to successfully challenge the validity or enforceability of that guarantee on the basis of the Ultra Vires Doctrine.
2.3 Is lack of corporate power an issue?
Yes, the Indonesian Company Law and the articles of association of an Indonesian company normally stipulate certain requirements to obtain a corporate power (approval) from the organs of the company i.e. board of commissioners' approval and/or shareholders' approval. Lack of corporate approval would legally affect the validity of the corporate guarantee and cause the board of directors to be held liable against any loss in relation to such provision of corporate guarantee/security.
2.4 Are any governmental or other consents or filings, or other formalities (such as shareholder approval), required?
Please refer to our explanation in question 2.3 above.
2.5 Are net worth, solvency or similar limitations imposed on the amount of a guarantee?
On the amount of guarantee, it is not specifically stipulated in the regulations. Please note, however, that Indonesian Company Law stipulates that the board of directors must request shareholders' approval to encumber the assets of the company having a value that exceeds 50% of the net assets in 1 (one) transaction or more, whether or not related to each other. Thus, it could somehow be interpreted that a guarantee needs to also consider the assets of the company.
2.6 Are there any exchange control or similar obstacles to enforcement of a guarantee?
There are no exchange control obstacles for the enforcement of a guarantee. The enforcement of a guarantee will be done through a court order. Please note, however, that the Indonesian court system recognises three levels of courts, namely the district court, court of appeal and Supreme Court. This means that if a borrower still challenges a decision from the judges of a district court and files an appeal to the court of appeal, the guarantee cannot be enforced by the lender pending the decision of the judges of court of appeal. This process would continue up to the Supreme Court, which can take years for enforcement.
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Previously published by Global Legal Group
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.