Financial Times investigation: The Bakries of Indonesia

Fraternal firm: Aburizal (left), Indra (second left) and Nirwan Bakrie (right), brothers who dominate the family’s commercial operations, with Samin Tan (second right), chairman of Bumi plc

A collapse in the Bakries’ London-listed coal assets has put the family’s business strategy in focus

Billowing plumes of steam rise into the East Java sky where noxious mud is belching out of the earth. Six years ago, this was the scene of an eruption during gas exploration by Indonesia’s most powerful entrepreneurial family.

The Bakrie brothers, whose business interests and political ambitions give them unrivalled prominence in the archipelagic nation, never agreed that their drilling triggered what scientists describe as the world’s largest mud volcano. Facing lawsuits in 2007, the family offered to pay $750m to settle the claims from tens of thousands of people whose homes and businesses were buried in sludge.

Thousands in the densely populated region were compensated or relocated. Then, in 2010, the Bakries’ payments ebbed. As the mud flows at a rate that would fill several Olympic-sized swimming pools a day, the family acknowledges it still has to pay $95m to the victims. Sutrisno, a construction labourer who lost his home beneath 11 metres of mud, is among those who says he has not received any money for more than a year.

“We were receiving a little bit of money each month until 2010 when the payment became irregular,’’ he says, adding he was last paid in January 2011.

The imbroglio may not appear to resonate beyond East Java but the Bakries and their business practices increasingly stir scrutiny because of the family’s pivotal role in Bumi plc, a coal operation that was brought to market in London in 2011 and was the second-worst performer in the FTSE350 index in the first six months of this year.

Investors were attracted by a prospectus backed by aristocratic ex-hedge fund manager Nat Rothschild and bankers JPMorgan indicating the Indonesian businesses were leading natural resources companies in their home market. Bumi plc, which owns 29 per cent of Indonesia’s largest coal mine controlled by the Bakries, was cast as a natural resource boon for the City. In fact Bumi plc has turned out to be a case study of the changing nature of the London list – or how the London Stock Exchange has in the past five years welcomed resource-rich companies from emerging markets, only to find these capital raisings add risks that even the most financially astute had not fully gauged.

High hopes
 
Mr Rothschild and a colleague were entitled to fees of at least $15m and an equity payout of some $150m in stock for arranging the transaction, according to the Bumi plc listing prospectus. Mr Rothschild boasted at the time that he wanted shareholders to make “two or three times their money” by welcoming the “Indonesian natural resources giant”. Instead, Bumi plc’s share price is down 77 per cent from its April 2011 peak; for Mr Rothschild this means a loss of more than $60m.

Bumi plc board members assured investors early this year that it could resurrect the share price in about a year, and pointed to prospects for Bumi Resources, one of two coal companies at the heart of Bumi plc and controlled by the Bakries. In June, however, the company failed to meet what it had signalled was a key marker – the early repayment of a $231m investment by Bumi Resources, in Recapital Advisors, controlled by Rosan Roeslani, a Bumi plc director.

The plummeting price of thermal coal amid the global economic slowdown – the commodity is down 35 per cent since January 2011 – has contributed to the share price slump. Corporate governance in other areas of the family business has also weighed on investor sentiment. For thousands of displaced people such as Mr Sutrisno, the Bakries did not keep their promise. For others, including mostly Jakarta-focused equity investors, the family’s strategy of ramping up debt to buy more assets without maintaining large cash reserves has resulted in repeated flirtations with bankruptcy, when shares used to guarantee loans have lost their value.

Those practices have left some banks choosing not to conduct research on Bakrie-linked companies and, according to analysts who have tracked the family’s prospects, some investors to give them a wide berth.

The Bumi plc prospectuses do not mention the mud volcano because compensation has been channelled through a specially-created family enterprise. The documents do not refer to the family’s history with repeated debt crises. So a row last year between the family and their allies and Mr Rothschild, over corporate governance standards at Bumi Resources, caught some investors by surprise. Mr Rothschild wrote a letter in November complaining that Bumi Resources had too much expensive debt, hefty related-party loans, and non-core investments. The Bakrie brothers struck back by orchestrating Mr Rothschild’s removal as co-chairman of Bumi plc.

Bumi plc’s share price had already fallen a few months earlier when the Bakries could not maintain the collateral on a $1.34bn loan that had been guaranteed with Bumi plc shares. The Bakries then ended up selling half their Bumi plc shares for $1bn to Samin Tan, a quick-witted Indonesian entrepreneur who is now chairman of Bumi plc. The Bakrie family today owns 22.3 per cent of Bumi plc; Mr Rothschild owns 9.8 per cent.

The deal reduced the family’s outstanding loan to $437m although investors may not be comforted. A similar comeuppance occurred in April this year: the collateral slid below the required level, speculation of a further stake sale followed and Bumi plc’s share price fell. Creditors have not yet demanded payment.

Cutting it fine
 
Running short of cash is characteristic of the business strategy for the Jakarta dynasty that expanded from humble beginnings in 1942 as a small trading company into a conglomerate through calculated buying sprees by pledging assets to secure more loans and then acquiring more assets.
The Bakries’ interests range from mining, energy and property to toll roads, telecoms and life insurance, acquiring its most lucrative holdings after the Asian markets crisis in 1998.

The business empire is dominated by three brothers now in their 50s and 60s, Aburizal, Nirwan and Indra. Aburizal, the eldest, stepped aside as chairman in favour of Nirwan in 2004 when President Susilo Bambang Yudhoyono appointed him as a minister, but is said to participate in major strategic decisions. He has been nominated to run for president in 2014 as head of the Golkar party, the base of the deceased dictator Suharto.

Lord Renwick, a Bumi plc non-executive director who advised Mr Rothschild before the acquisition, insists that sufficient due diligence was done on the Bakries business practices.

“People have been saying the Bakries are very complicated,” he says. “In fact, the Bakries are not complicated. The Bakries are highly entrepreneurial, which is complicated for people who are not an entrepreneur to understand.”

In addition to its businesses, the family underlines its philanthropy, which it has shown by setting up a university and a charitable foundation.

Mr Bakrie does acknowledge Indonesians need to demonstrate a respect for better corporate governance because “in the UK, you cannot play around”. “One of the Bakries had to come up and be responsible for whatever we are doing,” he said. “We have to explain to the market, to the people, what we are. We’re sure we’ll be able to tell people what they’ve been thinking of Bakrie is wrong.”

Bobby Gafur, chief executive of Bakrie & Brothers, the family’s holding company, said a decades-old leveraging strategy has resulted in numerous debt crises.

“The first crisis was in 1948,” he told the FT, adding they seemed to occur at least every decade. More recent setbacks – in 1998 and 2008 – had external triggers but cash and governance issues were ever-present.

The Bakries’ rapid expansion in the 1990s derailed in the Asian financial crisis of 1997, leaving the group with debts of $1.1bn. Creditors lost, at best, 80 per cent of their money and the family was left with less than 3 per cent of its original shareholding.

Still, the brothers were already plotting their recovery, beginning a crucial move into mining and natural resources. In 2001, they bought Arutmin, a thermal coal mine in Kalimantan, from BHP Billiton, the Australian miner, for $164m and then targeted a bigger prize.

Bill Schrader, then the Indonesia country chief for BP, recalls Aburizal Bakrie telling him in 2000: “I’m going to get that coal mine.” That coal mine was Kaltim Prima Coal, a mine in East Kalimantan that BP owned with resources company Rio Tinto.

By 2003, as BP and Rio were mired in legal disputes, the Bakries snapped up the mine for $500m. The mines were absorbed into Bumi Resources, and as coal prices soared in the following years so too did the company’s share price. In June 2008 its market capitalisation stood at some $17.5bn.

Life insurance policyholders protest

Some investors who have soured on the Bakrie investments are taking to the streets of Jakarta. About 200 Bakrie Life Insurance policyholders have been picketing and protesting over claims for millions in outstanding payments – estimated by them to be more than $25m – stemming from a family company allegedly not sticking to its stated investment strategy.

Freddy Koes Hariono, 67, who runs a trading company, says he invested almost $700,000 in a Bakrie Life policy only to see a year pass without payment. Mr Hariono, who says he is owed almost $200,000, has led demonstrations in front of the presidential palace, the parliament building and the futuristic Bakrie Tower to complain that the life insurer has run short because it invested mostly in shares of Bakrie family-related companies. “The portfolio should have been only 10 per cent in shares, the rest in deposits and bonds,” Mr Hariono says. “And those shares should not have been in the group but outside.”

In 2008, after shares in Bumi Resources and other Bakrie-linked companies collapsed following the onset of the global financial crisis and the family’s resulting debt crisis, Bakrie Life stopped allowing withdrawals, Mr Hariono says. By the next year, he adds, interest payments began to fall off; this year nothing has been paid.

Christopher Fong, a Bakrie spokesman, says the life insurance company “was severely impacted by the 2008 global economic crisis”, suffering losses of $42m, and had covered investor losses totalling $15m. He did not address the complaints about the investment strategy.

“As a limited liability company and within standard policy high yield investments are associated with a certain level of risk to which was clearly stated in the policy document and which is standard within the financial services industry, globally,” he wrote in an email.

“The Bakrie family through its investment unit Bakrie Capital Indonesia made the decision without obligation to rescue Indonesian investors by covering these losses, they are not legally required to make this commitment but as Indonesians they felt compelled to assist as best they could.”

Policyholders say they are particularly incensed because Bakrie Life’s parent company, Bakrie Capital Indonesia, recently paid millions of dollars for television rights to the 2014 football World Cup.

The tournament will take place in the middle of Indonesia’s prolonged general and presidential election season. Aburizal Bakrie, former chair of the Bakrie business group and the eldest of the three brothers that dominate the empire, is now head of the Golkar party created by the late dictator Suharto to be his political vehicle. He was nominated the party’s official presidential candidate in June.

Indra, the youngest brother and Bumi plc co-chairman, says the family businesses in Indonesia have been misunderstood by people untested in risk-taking in his part of the world. “People have been misled by rumours about what Bakrie really is,’’ he told the FT in an interview.

Then the global financial crisis hit. The commodity boom reversed and Bumi Resources’ share price – and other family-owned shares – collapsed. By September 2008 the shares had fallen in value so much, as the Bakries themselves admit, they no longer guaranteed loans of $1.1bn taken out by Bakrie & Brothers in short-term promissory notes.

The Bakrie group earned a respite when Jakarta stock exchange was controversially closed for several days by officials citing the market turmoil. Trade in Bakrie-related stocks remained suspended for several days after the exchange reopened.

Despite uncertainty, Bumi Resources continued with large acquisitions. The company bought stakes in three Indonesian coal-mining companies with close ties to other Bakrie family enterprises and, in some cases, paid so much that regulators opened an inquiry. The inquiry found Bumi overpaid for Fajar Bumi Sakti, a mining and trading company, but imposed no penalty.

Bumi Resources’ share price in January 2009 hit its lowest in the past decade, dropping to Rp385 (4 US cents) from its all-time high of Rp8,750 seven months earlier. The Bakries kept up a buying spree, acquiring Australia-based Herald Resources, which owned a concession with zinc and lead deposits in Sumatra, but analysts questioned the Bakries’ debt burden.

Layer upon layer
 
Alarm bells sounded again at the end of March 2010 when a small Jakarta-based lender, Bank Capital, announced its total deposits were less than what three Bakrie companies claimed to have deposited there as cash on hand. The companies were fined by Indonesian regulators for misreporting their deposits. Mr Gafur acknowledges Bakrie & Brothers erred by consolidating its deposits with Bakrie Sumatera, a plantation company, but insisted the figures in the media were incorrect.

Since few major financial institutions cover Bakrie-linked companies it is hard to be certain about the family’s finances. Chaim Estulin of Debtwire news agency, which is part of the FT Group, says investors cannot gauge how much the empire borrows against its assets, beyond saying it is much greater than other Indonesian conglomerates.

“It’s a big mystery how much they really owe,” he says. “There’s no answer to this. There are so many layers and layers,” Mr Estulin adds. Analysts estimated their debt in mid-2011 at about $5bn. They also say Bakrie & Brothers’ shares have stayed at the lowest level allowed by Indonesian market authorities since February, a sign of uncertainty.

Suzanne Smith, a managing director at Standard & Poor’s rating agency, said another major debt crisis in the empire could “easily happen again”. Wimar Witoelar, a Jakarta-based commentator, says nothing should be taken for granted with the Bakries. “They’re quite brittle because of their business strategy of taking out so many loans,’’ he warns. “Once the weak spot has been found the house of cards could collapse.”

Indra Bakrie declined to disclose the family’s businesses’ debt levels.

Both the family and investors say they hope Bumi plc’s share price will start to climb under Mr Tan, a 48-year-old former auditor who has worked with the Bakries on-and-off for 14 years. “The real dynamic here is around Samin Tan,” says one UK-based investor. “He thinks like us. The Bakries are different.”

But Mr Tan has battles within his own majority-controlled business group. Indonesia’s forestry ministry has told the FT it is investigating Asmin Koalindo Tuhup, Mr Tan’s coal-mining company, for allegedly violating its production permits. A tribal rights court in Indonesia earlier this year fined the company Rp486m ($51,428) for violating the rights of villagers living near the mine. Late last year, Indonesia’s supreme court found Mr Tan unlawfully dismissed AKT’s former Australian chief executive without paying him some $500,000 owed in salary and bonuses.

Mr Tan cannot appeal against the tribal court’s ruling but he said he is appealing against the decision regarding his former CEO. A spokesman for Mr Tan, said he knew of no problems with the forestry licence and no wrongdoing in the tribal rights case.

Bumi plc could be forgiven much if Mr Tan can improve efficiency. Mr Tan, who grew up in a remote part of Indonesia with a father who was a trader of dried coconut kernels, said his secret of success has been “working hard, working hard, working hard”. Bumi plc gives him a chance to do so in the next few months, he says.

“This asset carries a reputation issue, right or wrong,” Mr Tan says. “We’re fully conscious of that concern and it may transfer into risk. The market wants to see stability.”

“If you ask me if we’re worried, I say no. Because if we were worried, we wouldn’t have gone into the deal.”

By John Aglionby Additional reporting by Taufan Hidayat in Jakarta courtesy Joyo News