World's next debt disaster seen brewing in Indonesia's builder binge

The Trans-Java toll road, a 1,167-kilometer (725 mile) expressway snaking across Indonesia’s main island, is meant to be part of President Joko Widodo’s legacy-defining infrastructure push that helps bring the country’s economy into the 21st century.
 

Yet for those who follow the nation’s debt markets, the project — and other big ticket investments like it — are also a testament to the dramatic spending spree over the past decade by Indonesia’s largest builders and developers, many of which are now highly levered and face looming maturities.

The country’s top four construction firms — including the toll road’s main builder, state-owned PT Waskita Karya — have seen their total debt surge more than 12 fold to roughly 130 trillion rupiah ($8.6 billion) since Jokowi, as the president is known, took office. Despite restructuring 29 trillion rupiah of bank loans in 2021, Waskita Karya has appealed to Jakarta for a fresh capital injection. Private property-development companies are also juggling mounting obligations, just as rising interest rates sap demand.

The struggles are already reminding some analysts and investors of the high-profile debt debacles in China and South Korea last year, which were centered on the nations’ developers. And while they’re quick to note significant differences, a few warn that it may only be a matter of time before the financial strain spreads even further among Indonesian firms, fueling another potential hotbed of distress in Asia.

“The amount of debt that has been accumulated by construction companies in Indonesia draws similarities to what has happened in other countries, such as China’s property sector,” said John Teja, president director of PT Ciptadana Sekuritas Asia. “Something has to be done this year or the problem could spread to other sectors like suppliers and vendors.”

Waskita Karya’s debt woes could quickly come to a head. It has 2.3 trillion rupiah of local bonds maturing later this month and another 2.4 trillion due by May 2024, according to data compiled by Bloomberg.

When asked about the company’s broad debt situation, President Director Destiawan Soewardjono said “I’m looking for long-term financing from abroad so we have more breathing space and time to rearrange our finances.”

Concerning the upcoming bond maturities this year, Soewardjono said that the company “will make every effort to settle the obligations and continue to coordinate intensively with stakeholders and related ministries.”

The company is seeking to resume a delayed 3 trillion rupiah rights issue to the government by mid-year, while reviewing its restructuring agreement with bank lenders, and enter strategic partnerships for its toll road assets in order to improve liquidity and cut its debt load.

“We are pushing for a fundamental restructuring” of the company, said Kartika Wirjoatmodjo, deputy minister of State-Owned Enterprises, when asked about Waskita Karya.

Dams, Trains
 

The company, which trades on the Indonesia stock exchange but is majority owned by the government, competes with a handful of other state-backed firms for public contracts to build and often run infrastructure projects like dams and rail lines worth trillions of rupiah. Working capital needs are intense, and in recent years Waskita Karya and others have struggled to manage mismatches between payments to subcontractors and disbursements from the government. 

In 2021 the firm restructured 29 trillion rupiah of loans, mostly with state-owned lenders. The following year unit PT Waskita Beton Precast, which had trillions of rupiah in liabilities, entered a separate debt restructuring. 

Waskita Karya’s long-term liabilities reached an all-time high of 62 trillion rupiah at the end of its fiscal third quarter, and its financial charges, which include interest expenses on its bonds and loans, were more than three times its gross profit.

Ballooning obligations pushed the company’s total debt-to-equity ratio to 440 times, compared with 42 times for state-owned PT Semen Indonesia, the nation’s largest cement producer, and 37 times for PT Chandra Asri Petrochemical, one of the largest petrochemical producers in Southeast Asia.

Indonesian credit rating firm Pefindo downgraded the company to BBB- from BBB last month and put it under watch for further cuts, citing repayment risks tied to its upcoming bond maturity.

“Despite the recent downgrade and deteriorating operating conditions of Waskita, I don’t think it would be in the government’s interest to let this company fail,” said  Teddy Hariyanto, senior credit analyst at PT Mandiri Sekuritas. “With its sheer size, its failure could cause significant contagion risks.”

Waskita Karya is hardly the only firm facing financial stress.

Developer PT Kawasan Industri Jababeka, which runs an industrial complex east of Jakarta roughly the size of Manhattan, in December completed a distressed exchange with holders of dollar bonds due in 2023 that allowed it to extend the debt’s maturity until 2027. 

The new notes trade at about 77 cents on the dollar, according to data compiled by Bloomberg. 

Residential property developers are feeling the strain, too. The likes of PT Lippo Karawaci and PT Agung Podomoro are juggling significant debt loads and weakening sales amid higher interest rates, inflation, and slowing economic activity, according to Hasira De Silva, a senior director at Fitch Ratings.

“Operating cash flows will come under pressure, driving up leverage. The strong cash collections we saw in the last two years from the loosening of mortgage disbursement rules will normalize, while costs will remain elevated and interest payments will rise,” De Silva said.

Lippo earlier this month bought back dollar bonds due in 2025 and 2026 for as low as 74 cents on the dollar via a tender offer after they plunged into distressed territory. Agung Podomoro’s dollar debt due in 2024 has rallied in recent weeks, but is still trading in the 50 cent range, according to data compiled by Bloomberg.

Ting Meng, a senior credit strategist at Australia & New Zealand Banking Group Ltd., said that the sector is ripe for credit stress.

“Indonesian and Vietnamese property markets present the biggest risks for investors in the Asian corporate bond market,” Meng said. 

Representatives for Jababeka didn’t respond to requests for comment, while calls and texts to a spokesperson of Agung Podomoro went unanswered. Randi Bayu Prathama, head of investor relations for Lippo Karawaci, said “all the company’s efforts and plans have been disclosed previously in earnings calls and required disclosures.”

Even if Waskita Karya is able to generate additional funds via a rights issue later this year, some market watchers say it’s a stopgap measure at best. 

The company last year originally sought to raise 7 trillion rupiah, 3 trillion of which would have come via the government. That was postponed after the firm’s stock price tanked 29% in the fourth quarter. The company has also canceled previous plans to issue 3.9 trillion rupiah of local debt, according to Soewardjono.

“State construction companies are in dire need of fresh funding or a capital injection from the government,” Ciptadana Sekuritas Asia’s Teja said. “The 3 trillion rupiah injection to Waskita will only be good for a short-term, band-aid solution.”