February 25, 2024

DealBook: Standard Chartered’s Next Worry: A $1 Billion Indonesian Loan

Standard Chartered is facing another potential headache.

The British bank, which has just settled money-laundering allegations with the New York State’s top banking regulator for $340 million, may be at risk of losing money on a $1 billion loan to an Indonesian mining company to make an investment that has since soured.

The exposure highlights Standard Chartered’s reliance on often-unstable emerging markets for the majority of its income. The bank, based in London, earned around 90 percent of its $2.86 billion net profit from developing countries like China and India in the first half of the year.

The bank’s strategy is not risk free.

In January, Standard Chartered lent $1 billion to PT Borneo Lumbung Energi Metal, a Jakarta-based coal mining company owned by the Indonesian billionaire Samin Tan.

PT Borneo used the money to purchase a 23.8 percent stake in Bumi, a company that owns Indonesian coal mining assets and is listed on the London Stock Exchange.

Mr. Tan’s interest in Bumi is part of a wider boardroom standoff between the British financier Nathaniel Rothschild, who partly owns the company, and the Bakrie family, which controls another stake in Bumi.

After calling for a shareholder meeting earlier this year to reshuffle Bumi’s executives, Mr. Tan took over as chairman, while Mr. Rothschild became a nonindependent director.

In the wake of the management changes, Bumi announced on Monday that it was opening an investigation into financial irregularities at one of its divisions.

The allegations relate to financial accounting records at its subsidiary PT Bumi Resources. The irregularities are in connection to investments that were marked down to zero, according to a statement from Bumi.

The news caused the shares to drop 25 percent by the end of trading on Monday. Stock in the company has fallen 82 percent over the last year.

“We see this investigation as a positive development, although we feel it does have the potential to bring to light some gross and potentially criminal mismanagement of funds,” Richard Knights, an analyst at Liberum Capital, wrote in a note to investors.

For Standard Chartered, the danger is that PT Borneo may have lost money on its Bumi stake as the shares have continued to plunge.

In a default situation, Standard Chartered might have the right to collect the Bumi shares, but the stock may end up being worth a lot less than they were when Mr. Tan purchased them in January.

Still, Standard Chartered would be able to absorb any potential losses on the loan through its $33 billion of core capital. Standard Chartered may need those reserves, given that more of its corporate borrowers are having trouble staying current on their loans. In Standard Chartered’s wholesale banking division, “gross non-performing” loans totaled $4.06 billion at the end of June, up from $3.09 billion at the end of last year.

A spokesman for Standard Chartered declined to comment on the Indonesian loan.

Scott Merrillees, a director at PT Borneo and chief financial officer of Bumi, didn’t respond to an e-mail seeking comment on PT Borneo’s borrowings.

The investigation into financial irregularities at a subsidiary, coupled with a global financial crisis that has depressed coal prices, has hit Bumi’s prospects. The company reported a $106 million loss in the first half of the year.

The tough economic conditions also have weighed on PT Borneo, which reported a net profit of $191 million in 2011, the latest figures available. The company had $105 million of cash flow from operations over the same period.

It is difficult to ascertain the size of Standard Chartered’s exposure to PT Borneo, as the bank may have sold parts of the loan to other banks since January.

In April, Bloomberg News reported that First Gulf Bank of the United Arab Emirates had made a commitment to take $200 million of the $1 billion loan, citing a person familiar with the matter. A representative for First Gulf Bank declined to comment on Thursday.

PT Borneo’s chief executive, Alexander Ramlie, has also raised the possibility of a bond issuance to raise money to lower its debt to Standard Chartered, but the company’s Web site does not mention any such deals being completed.

In its most recent investor presentation in June, PT Borneo mentions the $1 billion loan. But it merely said that the Bumi stake was 100 percent financed by a $1 billion “amortizing senior debt facility provided by Standard Chartered Bank.”

If the London-based bank takes a hit on its PT Borneo loan, it would be another black mark against the firm, which until recently had a reputation as a careful lender.

Last week, Standard Chartered’s group executive director for wholesale lending, Mike Rees, gave an investor presentation outlining strategic goals for corporate lending. That included: “balancing the pursuit of growth with firm control of costs and risks.”

Article source: http://dealbook.nytimes.com/2012/09/27/standard-chartered-next-worry-a-1-billion-indonesian-loan/?partner=rss&emc=rss