The protracted row about the long overdue debt owed by the national flag carrier Garuda Indonesia to Bank Mandiri took a step towards resolution Friday when government announced it will cover the major part of it.
As the sole shareholder of the airline company, the government said it will live up to a commitment to guarantee the debt as agreed in a debt restructuring deal inked by Garuda and Mandiri in 2001.
"A promise is a promise," said State Minister for State Enterprises Sofyan Djalil in a press conference.
It is still unclear, however, by what mechanism the government will use to cover its part of the debt which was actually already overdue in 2003. Sofyan hinted that the government would take advantage of its influence over Bank Mandiri to help resolve the matter, as it controls 66.7 percent of the shares in the bank.
Sofyan also suggested that the government would probably cover the substantial unpaid interest owed to Mandiri while Garuda would have to pay up on the more modest principal debt of Rp 1.08 trillion (US$112.3 million).
The total amount of debt plus interest was at the heart of the dispute between the two state firms. Mandiri issued a statement Wednesday saying that since the debt had swollen to a total of Rp 3.36 trillion, including the accumulated cost of an agreed 18 percent annual rate of return. Garuda insisted however that the total value of the accumulated debt, including interest, should be lower, without giving any exact figures except for the value of the outstanding principal.
Responding to this protracted dispute between the two state-owned enterprises, Sofyan said that the substance of the dispute was no longer an issue as the government clearly would take responsibility, whilst not answering specifically how the government would pay the substantial interest payments owed to Bank Mandiri.
"Whatever the mechanism would be, we will make sure the government still has a controlling stake in Garuda," Sofyan said referring to a debt-to-share conversion option agreed upon earlier in the debt restructuring deal.
The deal stipulates that the Rp 1.08 trillion principal loan is convertible to shares in Garuda. The amount of shares will be based on a valuation of Garuda's shares in an initial public offering *IPO*. Garuda's foray into the stock market was initially to be carried out in 2003 but was postponed several times. The latest commitment says the IPO will go ahead in June next year.
Garuda has secured approval from the lawmakers to issue up to 49 percent of its stake through the public offering.
According to Garuda's own calculation, the loan principal is equal to 11 percent of ownership in the company. Garuda expects to raise Rp 4.2 trillion in the IPO, which translates into a total valuation of about Rp 14 trillion for the airline company.
The government is hesitant to use the conversion option as it fears it would greatly dilute its ownership.
Another option, Sofyan said, may include allowing Mandiri to derogate from making the annual dividend payment to government. Injecting direct government cash from the government's annual budget into the firm would be harder he said, as it would require House approval.
"We can discuss later on *how*the loan will be paid. The important thing is that Garuda holds the public offering first and the loan principal can be repaid," Sofyan said.
With regard to Garuda's performance, a closer look at Garuda's finances shows the airline started generating profits in 2007. Last year, operating profits reached Rp 1.2 trillion and net profits Rp 669 billion, out of revenues of Rp 19.4 trillion.
The improvement of performance, analysts said, would serve as leverage for the company's share valuation for the long awaited IPO.
