The Government of Indonesia is contemplating using securitization as part of a rescue package for two state-owned airlines, Garuda Indonesia and Merpati Nusantara Airlines. If successful, ABS technology could potentially aid other ailing state-supported companies, sources say.

Sugiharto, minister for state enterprises, has met with officials at the two carriers to discuss the implementation of a restructuring fund aimed at injecting new capital while also removing sizeable debts from their balance sheets.

Garuda, Indonesia's biggest airline, currently has debts of around $800 million. Meanwhile, Merpati owes its creditors - ironically including Garuda - $144 million and allegedly needs to raise $48 million in order to keep flying.

According to sources, the government is looking at raising the funds by securitizing some of its shareholdings in both state-owned and private sector companies, including telecoms giant PT Indosat.

No details have emerged on how much could be raised this way, whether transactions will be domestic or cross-border or the likely timing of any deal. However, it is likely securitization would be part of a wider initiative, which will include some debt-for-equity swaps by the airlines' creditors.

They would also need to approve such initiatives. Although that proved elusive with previous proposals, which included establishing an SPV to manage debts, the urgency of the situation may convince creditors to accept the ABS and debt-for-equity solutions.

Securitization as a means of resolving bad debts in Indonesia has found itself on the agenda in recent months. The country's biggest bank, Bank Mandiri, recently announced it is considering NPL securitization.

State-owned Mandiri has NPLs totaling $900 million. That represents 7.7% of its loan portfolio; above the 5% level demanded by the central bank. In order to comply with those regulations, several investment banks have been approached to pitch on resolution ideas, including securitization (ASR, 05/15/06).

NPL ABS is not new in Asia, and was used extensively by Korean entities at the back end of the 1990s and early part of this decade.

Additionally, the Indonesian government's counterparts in Hong Kong, Singapore and Thailand have set a template for state-linked ABS in recent years, securitizing tunnel and toll road receivables, SME loans and future office rents.

Staying on the government theme, the Export-Import Bank of Thailand (EXIM) is considering establishing an ABS program. On starting his post last week, new president Apichai Bootherawara told local media the state-controlled institution was looking at securitizing part of its loan portfolio in order to raise funds for new origination.

The EXIM, whose main function is to provide financial support to local companies wanting to expand internationally, currently has a loan book totaling THB60 billion ($1.6 billion) and wants to increase that by at least 15% in 2006.

Previously, it had been expected the bank would issue straight bonds, something it has done previously, to boost origination. However, Bootherawara - who has extensive investment banking experience - may view the twin benefits of competitive pricing and potential capital relief through ABS as a more attractive option.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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