We wrote about the travails of investing in Indonesia in July in a piece titled Hedge funds bitten by the Indonesian beast, which described the woes felt by a group of international hedge funds as their relationship deteriorated with an investment made with Red Dragon, and an underlying transaction of CP Prima shares.
At that time, we couldn't get a response from Red Dragon, but representatives recently visited AsianInvestor in Hong Kong to tell their side of the story.
To set the scene: A consortium of hedge funds, organised by BNP Paribas, invested in exchangeable bonds issued by a vehicle named Red Dragon. The shares were exchangeable into shares of CP Prima, an Indonesian food company, which is part of the food empire controlled by the Thai Chearavanont family. The bonds were secured with cash and shares to the value of 250% of the outstanding bonds.
The original size of the deal was $200 million, and after some sales, the amount now outstanding to the hedge funds is approximately $125 million. Interest coupons apparently continue to be paid.
Red Dragon says, with the decline in the rupiah that took place late in 2008, there were breaches of the requirement to keep that level of collateral margin. On five occasions, more CP Prima shares and cash were deposited to keep the margin in order.
However, on the CP Prima side, there was a problem.
As the rupiah fell, their debt-to-equity gearing ratios ballooned. They were in potential default of their loan covenants, including their working capital facilities, the loss of which would bring their business crashing down.
To rectify this, a solution was devised whereby an existing subordinated loan from the other shareholders would be converted into common equity.
Bingo; the debt-to-equity ratios would be redressed and the company would survive.
Now, the Red Dragon bondholders wouldn't get to participate in such a rights issue, because they weren't shareholders. Nevertheless, their consent was needed. We have been shown a document apparently from Bank Danamon that intimates that consent was given by Bank Danamon for some act concerning the underlying shares, but it's not transparently clear from the document what that act is.
An extraordinary general meeting was held, the plan was approved and Indonesia's capital market supervisory agency Bapepam consented.
Red Dragon says that they started negotiating with the bondholders about placing additional collateral margin and changing the terms of the exchange.
However, in December, the bondholders trustee, Bank of New York Mellon, issued a notice of default.
In Red Dragon's opinion, what the bondholders had decided was to make an attempt to use the technical breach of collateral to drive through an attempt to take possession of all the collateral, and snatch control of CP Prima, a company which, the proprietors say, had it not fortified its gearing ratios, might be bankrupt anyway.
Red Dragon says that the bondholders hired a lobbying company, one that belonged to former PT Danareksa president director Lin Che Wei, in order to complain to Bapepam. However, they say that Bapepam did not succumb to the lobbying and the latter's requirements that certain procedural events be rectified were upheld in a shareholders' meeting in May 2009.
However, the bondholders had already started to accelerate their claims over the collateral, issued a notice of acceleration and started the legal processes. To date, they have title to 6.7% of the collateral (via the Singapore Courts), but they still have to get the signature of a Red Dragon director (which they don't have). Proceedings on the rest of the collateral are taking place in other jurisdictions.
Red Dragon, CP Prima and the Chearavanont family feel very vexed, and perceive that the bondholders are unfairly portraying them as a bunch of swindlers out to nobble foreign creditors, whereas, they reckon the bondholders are using the fine print to make an opportunistic and rather cynical grab for their company, whose survival would have been in jeopardy had the debt-to-equity ratios not been rectified.
So, as you might expect, negotiations have broken down and everybody is sulking. Red Dragon et al are suing Bank Danamon and Bank New York Mellon for $4 billion for sullying their name and reputation.
So what do the other side think about this?
A source close to the action says that the idea that they want to grab the company is ridiculous and they have no idea how to run a prawn farm. The source says that if they did want to take the company they would have started doing so as soon as the flaws in the deal started to appear last year, rather than wait until April to accelerate their claims. He says there was a deal to renegotiate the collateral and conversion terms but it fell apart on the eve of execution.
To make matters worse, now the prawns have taken ill. They have not coped very manfully (prawnfully), and have become poorly due to a virus in their pond.
In a nutshell, everyone has become extremely bored and frustrated with having to deal with each other; hence the movement away from the negotiating table and the warlike gestures towards the courtroom. You have to conclude that this could all be sorted out in an hour by a couple of people having a beer at Tiara Ceria bar in Jakarta, and mindful that 99% of civil cases are worked out on the courtroom steps, we can still hope for an Indonesian happy ending.