China’s Bakrie burns may have less of a sting. Like financier Nat Rothschild, China Investment Corporation has been scorched by its association with Bumi Resources. Following a $1.3 billion debt swap, the sovereign fund has gone from a major creditor to minority investor in the Indonesian miner.
CIC has held back from investing alongside Bumi’s controlling Bakrie family for as long as it could. The fund extended a three-tranche $1.9 billion loan to Bumi back in 2009 in a deal that was supposed to deliver the lender an internal rate of return of 19 percent, according to a Bumi filing this year. CIC got back $600 million in 2011 through an early redemption. But now it appears to have concluded that its chances of recovering the rest of its debt from the overextended miner are slim.
Instead, CIC has entered into a debt swap that will leave it with a 7 percent shareholding in Bumi Resources as well as stakes in four of its subsidiaries. The deal will reduce the company’s net debt at the end of the year from almost 7 times its earnings before interest, tax, depreciation and amortization to less than five times, according to Thomson Reuters Eikon. That should relieve some pressure on the company’s dire credit rating and help Bumi boost its earnings following a slump in the coal price.
The immediate question is whether the debt swap will upset plans to separate Bumi plc, the London-listed vehicle co-founded by Rothschild and the Bakrie family, from its estranged Indonesian namesake. Bumi plc wants to offload its 29 percent stake in Bumi Resources to the Bakrie family for $501 million. It’s unclear whether the CIC debt swap is supposed to happen before or after that transaction. But as the Chinese deal requires approval from 75 percent of Bumi Resources shareholders, the UK-listed company should in theory be able to defend its interests.
The bigger conundrum, however, is why CIC would want to climb into bed with the Bakrie clan. Here, its state backing may help. Most of Indonesia’s coal is exported to China, and the Middle Kingdom is pouring billions into Indonesian mining projects. Unlike Rothschild, CIC should be able to appeal to its hefty political backers if the Bakrie clan threatens to act out of line.