Around 63.94 percent of bondholders, equal to around 777 billion out of the total 1.2 trillion voting rights, refused to accept WSKT’s explanation for the delinquency and rejected the debt-restructuring proposal. Meanwhile, 31.97 percent of bondholders accepted WSKT’s proposal and 4.09 percent compromised by extending the deadline to Jan. 5, 2024.

The debt restructuring was proposed to bondholders as well as to their bank creditors. According to WSKT corporate secretary Ermy Puspa Yunita, bank creditors representing around 80 percent of WSKT’s outstanding loans have already accepted the proposal.

On the other hand, compared with banks, insurance companies and pension funds are much more susceptible to credit risk. The precise risk exposure caused by the default WSKT and WSBP bonds are still under investigation by the Financial Services Authority (OJK), however Indonesian Pension Funds Association (ADPI) chairman Ali Farmadi warned that maintaining the current conditions, which is to extend WSKT’s payment extension deadline, would threaten the capital adequacy of pension funds to pay for pension claims.

According to data from the Indonesian Central Securities Depository (KSEI), pension funds are the second-biggest holders of WSKT and WSBP bonds, second only to insurance companies. Since 2018, WSKT and WSBP have issued a total of Rp 8.94 trillion in bonds, spread throughout 10 bond series. Roughly Rp 4.34 trillion of that amount was purchased by insurance companies, followed by Rp 1.8 trillion purchased by pension funds, and 1.5 trillion by mutual funds.

These investment trends were heavily influenced by Article 2 of OJK Regulation (POJK) No. 1/2016 on state bond investments for non-bank financial service institutions. The article stipulates that 20-50 percent of investments by non-bank financial service institutions, depending on the type of financial service provided, must consist of government bonds (SBN).

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Market players at the time complained about the requirement, which led to the issuance of POJK No.36/2016 that expanded the investment instrument to also include bonds issued by state-owned enterprises (SOEs) and their subsidiaries, as well as region-owned enterprises (BUMD) to fund infrastructure projects.

The investment instrument was expanded further with Article 4A of POJK No. 56/2017 to include mutual funds and asset-backed securities as long as the funding is used for infrastructure projects.

The reason behind introducing these regulations was to secure funding for the government’s infrastructure projects. While the non-bank institutions were allowed to invest in any state-issued bond or security, insurance and pension funds were attracted to WSKT bonds due to their high coupon rates. For example, sustainable bond WSKT04CN1, the bond on which Waskita failed to pay the interest and principal on Aug. 6, had an extremely high coupon rate of 10.75 percent.

Under normal circumstances, investors tend to be suspicious of abnormally high coupon rates. Some people may wonder why such large investments were made into WSKT, especially now as the current sentiment toward WSKT is quite negative. However, WSKT was regarded as a well-performing company. This was especially the case before it was revealed that the company’s sales were based on fictitious projects.

What’s More

A life raft to resolve WSKT’s financial troubles is the prospective merger with fellow state-owned construction company Hutama Karya. This move would add Hutama Karya’s assets to WSKT’s emptied coffers, potentially rescuing the company and subsequently paying off the debts to bondholders.

On the other hand, this merger comes with its own share of risks. Hutama Karya, much like WSKT, has also been tasked with building strategic infrastructure projects and took on similar liabilities to fund those projects. After the merger, WSKT would also have to bear the burden of these liabilities.

Moreover, Hutama Karya has also begun taking over some of WSKT’s unfinished projects, such as the trans-Sumatra toll road. Construction on the Kayu Agung-Palembang-Betung (Kapalbetung) and Bogor-Ciawi-Sukabumi Cibadak-West Sukabumi road sections of the trans-Sumatra toll road project are estimated to require Rp 12.5 trillion in funds.

Hutama Karya will have to bear these costs along with WSKT’s debts, which are estimated at around Rp 22.79 trillion for short-term debt and Rp 61.5 trillion for long-term debt based on the company’s financial reports. Meanwhile, Hutama Karya is currently only slated to receive a capital fund injection (PMN) of Rp 18.64 trillion according to Hutama Karya president director Budi Harto.

What we’ve heard

A source in one of the state-owned enterprises (SOE) said that pension fund managers are worried about the fate of their investments in bonds of Waskita Karya and its subsidiaries. Since Waskita was hit by financial problems, bondholders have had difficulty selling their bonds. "Even though you sell them at half the price, no one wants to buy them," said one state-owned pension fund manager.

Waskita's delisting plan from the stock exchange floor has made pension fund managers even more wary.  Moreover, the bondholders are unable to reach a unilateral agreement, leading to the Waskita bondholders general meeting being inconclusive. "Many BUMN pension funds are screaming," said the source.

An SOE employee confirmed many of the state-owned company pension funds to have fallen for Waskita bonds. Notorious among the confirmed funds is Dapen Pertamina. However, there are several other major state-owned enterprises' pension funds with large deposits trapped in Waskita bonds.

Apart from pension funds, insurance companies are also listed as one of Waskita's bondholders. They were caught buying Waskita bonds after OJK issued POJK 36/2016, which requires the non-bank financial industry to invest in infrastructure development securities.

This regulation has also made pension fund managers upset with OJK. They feel that OJK has washed its hands of the issue despite having contributed significantly to the problems they face.

Not only bonds or debt securities, many pension funds claim that regulations also forced them to buy Waskita shares when there is an IPO or rights issue. "We were forced to buy," said the source. With the situation having the developed the way it has, many pension funds are losing money.

Meanwhile, fellow troubled construction SOE Wijaya Karya (WIKA) is rumored to be going to arbitration to settle its debts.

Disclaimer

This content is provided by Tenggara Strategics in collaboration with The Jakarta Post to serve the latest comprehensive and reliable analysis on Indonesia’s political and business landscape. Access the latest edition of Tenggara Backgrounder to read the articles listed below:

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