State-owned airline Garuda Indonesia and Merpati Nusantara have narrowly escaped bankruptcy from mounting debt, with the government grudgingly agreeing to issue a letter of guarantee for their current US$150 million cashflow shortage.

The management of the ailing carriers will now be able to negotiate with their creditors the possible restructuring of their debt — currently amounting to a combined $976 million — or seek new loans for the bail-out funds.

The decision, reached in a hearing Monday between the House of Representatives’ finance commission, Finance Minister Sri Mulyani Indrawati and State Minister of State Enterprises Sugiharto, has strings attached, with the government requesting strict terms and conditions for the guarantee.

Sri Mulyani disagreed with Sugiharto during the hearing before finally approving the letter of guarantee as a short-term solution for the firms’ problems, on the condition it would be based on a thorough financial audit of the two airlines.

It must also not create a moral hazard, thereby allowing other state enterprises to also seek bail-out funds for their business ailments.

The government and the House also agreed, as a long-term solution, to follow up on any possible debt restructuring schemes, including the establishment of a special purpose vehicle (SPV) for Garuda’s debt, and to seek new loans to strengthen Merpati’s cashflow.

“We have to be careful in deciding to use budget funds as a solution for Garuda and Merpati, because this year’s fiscal risks are still high, while we cannot just allocate more funds as well prior to the budget’s revision schedule,” Sri Mulyani said.

“We also do not want state firms to feel they have a big brother behind them who will always bail them out through the state budget.

“We will agree on the letter of guarantee and trust the state minister for state enterprises on the temporary amount of the funds (as reserves for the government guarantee) Garuda and Merpati need for now, but we will request their exact term and usage upon the completion of the audit.”

Sugiharto earlier in the hearing proposed the establishment of an SPV, or a special company to manage Garuda’s debt, which would take over $644 million of the national flag carrier’s total $794 million debt, along with six of its aircraft.

Under the 10-year scheme, Garuda would then pay back the SPV a monthly aircraft leasing fee of US$30 million, with the government guaranteeing the scheme.

“This is expected to be better than the government having to directly inject $105 million by this March, as Garuda would have time to sort out its financial problems while also getting a more proper lease fee,” Sugiharto said.

“But we require Garuda to fix up its ways of doing business, including possible personnel downsizing and spinning off unnecessary subsidiaries.”

Besides the $794 million total debt, Garuda has over the past two years experienced losses of Rp 811 billion and Rp 691 billion, with $88 million of its $93 million debt to European Credit Agency having fallen due last year, Sugiharto said.

Meanwhile, for the Rp 450 billion in funds urgently needed to help cover Merpati’s Rp 1.7 trillion debt and cashflow deficit of up to Rp 20 billion each month, Sugiharto proposed seeking bridging funds of $50 million in five-year loans from creditors, which the government would guarantee.

Sugiharto also mentioned that the two schemes were flexible, expecting that as the airlines’ condition improved, the government may recoup its guarantee costs by offering up to 49 percent of their shares through an initial public offering.

Source: www.thejakartapost.com (March 14, 2006)