Bumi Resources: Analysis of Debt Restructuring

Last September, the management of Bumi Resources (BUMI), the largest mining company in the Indonesia, announced the company’s latest proposal of debt restructuring. As of August 31, 2015, the outstanding debt of BUMI stood at nearly US$ 4 billion, and most of them will mature in less than a year. Given the poor condition of mining sector, including the price of coal remains low in the last few years, the company had no choice but to propose the options of debt restructuring to its creditors.

BUMI is one of the most indebted company in the history of Indonesia. Since taken over by Bakrie Group in 1999, they acquired almost all of its mining assets by using ‘someone’s else money’ aka debt. And somehow they managed to become the majority shareholder of PT Kaltim Prima Coal (KPC), the largest coal company in Indonesia, and 24% stake in PT Newmont Nusa Tenggara, the second largest gold mining company in Indonesia, and also several other mining assets, making them the largest mining company in the nation. Everytime they saw an opportunity to take over a company, they’ll do it without even thinking about whether they had sufficient fund or not. BUMI, in the hands of Bakrie Group, is a perfect example about how greedy a corporation could be.

So when the price of coal and other mining commodities began to decline in 2012, BUMI immediately faced the problem of its mountainous debt. But while many other companies got ruined by their debt, BUMI until today has never experience a default or get sued for bankruptcy by its creditors. When a few months ago Berau Coal Energy (BRAU) declared default, I believe that the management team had been trying hard to evade the default, but yet they fail, even though the value of the defaulted debt was ‘only’ US $ 500 million.

While BUMI? Its outstanding debt amounted to US$ 4 billion, aka much larger, but still they’re just fine.

And through its latest proposal, the management of BUMI proposed that the US$ 4 billion debt will be restructured as follows:

1. US$ 1.2 billion will be converted into a senior secured facility, which will mature in five extended years. The management of BUMI requested an extended time of five years for this debt, but the creditors will receive additional collateral, while the interest rate unchanged.
2. US$ 1.5 billion will be converted into a 32.5% stake in BUMI. If this proposal is accepted by the creditors, then it means that they (creditors) agreed to assume that the net value of BUMI is US$ 4.6 billion.
3. US$ 630 million will be converted into shares in several subsidiaries of BUMI.
4. US$ 150 million will be converted into shares of BUMI at a price of Rp250 per share, based on the assessment that the net value of BUMI is US$ 4.6 billion. This means that this debt received a better treatment than the debt of US$ 1.5 billion above (point 2), which will also be converted into shares of BUMI but at a much higher price (we’ll explain it later).
5. US$ 141 million, will be paid off using the proceeds from the sale of a subsidiary, PT Fajar Bumi Sakti (FBS).
6. The last US$ 410 million, its mature date will be extended to five years, and after that five years it can be converted into shares of BUMI.

The debt restructuring proposal. Click image to enlarge

Okay, take a look at point 2, where the management of BUMI tried to sell shares of BUMI to several creditors at a price that reflects value/market cap of US$ 4.6 billion, or Rp60.7 trillion using the exchange rate of Rp13,200 per US $. Because the number of BUMI’s outstanding shares was 36.6 billion, then the market cap is equivalent to.. Rp1,660 per share.

The question of course, how could the creditors willing to exchange their credits/receivables for BUMI shares at such a high price, while the stock price of BUMI in the market is only about Rp50 per share??? In addition, based on the company’s financial statements for First Half 2015, it is clear that BUMI’ net equity was minus US$ 1.4 billion (capital deficiency). So how could the management of BUMI considers that the net value of the company is US$ 4.6 billion???

But maybe, just maybe, the net value of BUMI is actually higher than its book value. Here’s the explanation:

Hidden value?

Since the management of BUMI began restructuring company’s debt in July 2013, one of the measures is to release the 19% stake in KPC to one of creditors, China Investment Corporation (CIC), at a price of US$ 950 million. As you may know, BUMI had debt from CIC amounted to US$ 1.9 billion with an interest rate of 19% per annum. And when coal price began to decline, that’s when BUMI faced difficulties to meet its obligation related to the debt. Just before BUMI was about to default, both BUMI and CIC agreed to convert half of the debt (US$ 950 million) into 19% stake in KPC.

So that means that the management of CIC considers that the value of stake in KPC they received is greater than, or at least equal to US$ 950 million plus interest at 19% per annum! CIC is a giant investment company, they sure have done a very careful calculation before accepting the proposal of the debt conversion. KPC itself, as we know, is one of the largest coal producer in the world, and is the major asset of Bumi Resources.

Thus the value of KPC, or at least in the view of CIC, is US$ 950 million / 19% = US$ 5 billion! And that's not including the additional value which comes from the interest of 19% per annum, which mentioned earlier. So if Sir Nirwan is not willing to take care of BUMI’ debts, he only need to sell KPC to receive cash of US$ 5 billion or more, and it was more than enough to pay off all of BUMI outstanding debts of US$ 4 billion, and even after that the company will still hold Newmont, Arutmin, and others (to see Bumi Resource’s list of subsidiaries, click here). But of course, a bold character like Nirwan Bakrie will not give up so easily.

Because KPC is only one of several assets of BUMI (though KPC is the largest subsidiaries, or second largest after Newmont), then the value of BUMI’s total asset must be far above US$ 5 billion. But why, in the latest financial statements of the company, BUMI had total asset of only US$ 4.4 billion? Well, it's because BUMI, like the majority of other mining companies in Indonesia, accounted the value of its assets based on acquisition cost and not its current value. Because BUMI acquired KPC in 2003 at a price of US$ 500 million, then so be it, until today the value of KPC in the financial statements of BUMI is accounted at about US$ 500 million (changed a little because of the share of profit/loss, depreciation and amortization, the change of stake owned, etc.), and not US$ 5 billion as it might be its current value.

The point is, the real value of BUMI may be much greater than what is shown in the financial statements, and perhaps that’s why the management of BUMI assumed that the net value of BUMI at the moment is about US$ 4.6 billion (equivalent to Rp1,660 per share), instead of minus US $ 1.4 billion like its book value.

Time to buy?

If the restructuring proposal was approved by all parties, here are few things that will happen:

1. BUMI’ outstanding debts will be reduced by US$ 2.4 billion.
2. Because the debt is reduced, then in its financial statements, the equity value of BUMI, which was minus US $ 1.4 billion, will likely to be positive again.
3. However, the overall value of company’s assets will also be reduced, because there are some shares in BUMI’ subsidiaries that are no longer belonged to the company.
4. The remaining debt of US$ 1.6 billion, their maturity will be extended to five years. Assuming that the coal prices should recover in that time period, then such ‘small’ debt should not be a problem for BUMI.
5. The interest expense will be reduced drastically, so the net earnings margin of will increase sharply in the future.
6. BUMI will be owned by several new shareholders that hold a total of 32.3% of its shares. The new shareholders acquire BUMI shares at a price of Rp1,660 per share.
7. There is one new shareholder who acquire BUMI at a ‘low’ price, ie Rp250 per share.
8. All is done! Furthermore, BUMI will have to just waiting for coal prices to recover.

Well, up to this point, do you understand why I began to see this BUMI in a different way? BUMI, at the price of Rp8,000 per share, 5,000, 1,000, 500, or even 300, is not attractive. But what if Rp50 per share? And don’t forget about the hidden value value. As Opa Warren said in the '60s, ‘We like to buy a stock at a price that is so low, that when we sell it at a normal price (not too high), we will still make a profit.’ Make it simple: If you buy BUMI and it rise to 250 only, then you will make a five-fold profits, won’t you? Let alone if it rise to 1,660! Of course there is always a risk, but this time the profit opportunities are far greater than the risks and, bear in mind, in the end of 2008, Gita Wirjawan also bought BUMI at a price of about Rp700 per share until he made a tremendous profit after selling it at the price of 2,500, about two years later. And do you think that Mr. Gita, who had served as President Director of JP Morgan Indonesia, was only a geeky trader who knows nothing and just trying his luck when he acquired BUMI? I do not think so!

However, if you also interested in BUMI, there are at least three things you should also consider. First, the debt restructuring proposal that has been discussed above is still a proposal, and it is not necessarily approved by the creditors. If CIC and other creditors reject the proposal, all the scenarios would be different, and BUMI’s debt will not be reduced at all. Second, we have discussed about the 'hidden value' of BUMI, but investors will still read the financial statements only, and the company’s financial statements are one of the most bad statements I’ve ever read, and that’s why BUMI share price could be as low as today. Unless later financial statements show that BUMI’s net equity become positive, the stock have not had a reason to go up.

And third, do not forget that BUMI is still controlled by Bakrie. If they even can beat a world class financier like Nathaniel Rothschild, then do not expect that you will be given a red carpet and bouquet of flowers when you buy BUMI. As an investor, I still cannot trust Bakrie as the controller shareholder of BUMI, at all. By considering this factor of management, the decision to buy BUMI, even though using a very careful judgment, remains closer to speculation rather than investment. So I myself, even if I eventually buy the stock, I will use only a small part of my whole asset.

Okay, your comment?

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com.