Hedge funds bitten by the Indonesian beast

æNewÆ Indonesia looks a whole lot like æOldÆ Indonesia. CQS, Marathon, Highbridge and GLG are understood to be suffering woes at IndonesiaÆs latest reversion to type.

Once upon a time, Indonesia had a reputation for sharp practise. However, the balloon of epiphany went up after the Asian economic crisis of the late-1990s. The gatekeepers of Indonesia realised that, in business, their old game was up, and in order to obtain foreign investment, they would have to play fairly and decently. They did just that and everyone lived happily ever after.

It makes a nice fairytale ending, but who really is that lying in the bed of Little Red Riding Hood's granny? And why does granny have such big teeth?

Hedge fund investors are finding the wolf under the eiderdown in the form of a deal they undertook with Central Proteinaprima in Indonesia. CQS, Marathon, Highbridge and GLG Partners, among others, are understood to have bought $200 million in 2% secured exchangeable bonds issued by a company called Red Dragon in 2007. The bonds were convertible into ordinary shares of Central Proteinaprima.

Red Dragon is a Singapore special purpose vehicle controlled by the Chearavanont family, which is behind both the bond issuer and the Charoen Pokphand Group that hails from Thailand.

The bonds that the hedge funds bought should have given them a 70% stake. However, the company undertook a rights issue, didn't tell the hedge funds about it, and that has diluted their interest to about 41%.

That's the precise moment when the two parties fell out of love.

Bondholders complained. Red Dragon got in high dudgeon and hired the lawyer that crushed Manulife in Indonesia. The firm started issuing multiple $1 billion writs suing just about everyone connected with their investor counterparties.

On the side of the Chearavanont family, up popped Hendrik Tee, the former CFO of consummate debt reneger Asia Pulp and Paper.

AsianInvestor tried to obtain a comment from Red Dragon regarding this story, but there had been no response at the time of publication.

If anything material has come out of financial crises, it is the invention of a new job description; a person who rapidly switches a white hat for a black hat and advises companies on how to combat investors.

It seems to add insult to injury that not only have the investors been diluted, but for the perceived upset they have inflicted on the issuer, they might also be billed billions of dollars.

Aha, but surely the court with jurisdiction over the deal is going to adjudicate that this a frivolous counter claim? Not so, because the governing law in the documentation is not only English, but Indonesian law as well. So it is back to the South Jakarta District Court, a familiar forum for foreign financial institutions.

There are two sides to every story, so AsianInvestor readers need not leap to conclusions just yet. We have asked Central Proteinaprima and Red Dragon to tell us their version of events.

Though it appears the moral of this story so far is that investors (yes even the sophisticated ones) need to read the fable of the frog that allows the scorpion to ride across the river on its back.

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