Annisa Suci Ramadhani

Should the material transaction rule apply to publicly listed Indonesian companies that raise funds in the international bond market?

Generally, a debt is considered to be offered in the international bond market when the issuer is not domiciled within the jurisdiction where the bond is offered, and the offering does not constitute a public offering according to local regulations. There are many bond types and features traded in the international bond market and because of the multiple jurisdictions involved, global bond issuance is covered by different regulations and requirements.

Global bonds, such as high-yield bonds, are beneficial because these can be a tax-friendly way for Indonesian companies to raise money in different foreign markets (that are considerably larger than the funds from the domestic bond market) and with covenants that are typically less onerous than standard bank facility covenants. The confirmation of Indonesia’s Sovereign Credit Rating at BBB/stable outlook for 2019 may also create a coherent positive impact on Indonesia’s corporate bond rating. These factors encourage Indonesian companies to raise funds from the global bond market.

Most of these Indonesian issuers (in a direct issuance structure) or Indonesian parent guarantors (if the bonds structure issued through the company’s wholly foreign-owned subsidiary) are publicly listed companies. Currently, there is no Indonesian regulation specifically stipulating the global bond issuance by Indonesian issuers. However, in addition to regulatory procedures which may be required under sectoral regulations, and other applicable regulations (depending on the issuance structure), the public companies looking to issue a global bond must comply with Capital Market and Financial Institutions Supervisory Agency (Bapepam-LK)  Regulation No. IX.E.2 on material transactions.

Pursuant to the material transaction rule, a material transaction, including borrowing, lending and guaranteeing (in one transaction or a series of related transactions for a particular purpose or activity) with a transaction value of 20 percent to 50 percent of the publicly listed company’s equity, must prepare a public disclosure that covers a summary of a fairness opinion by an independent appraisal. Meanwhile, a material transaction with a value in excess of 50 percent of a company’s equity must be approved by a majority of the shareholders and fulfill the fairness opinion and disclosure requirements.

This rule, however, exempts companies that receive loans directly from banks and issue nonequity securities through a public offering in Indonesia registered in the Financial Services Authority (OJK). The regulator may reasonably exclude bank financing because it understands that the provision of financing by commercial banks has gone through a very rigorous creditworthiness and know-your-customer (KYC) assessment. Meanwhile, public offerings may be excluded because they are considered to have met standards of public offering requirements in Indonesia (e.g. a professional audit and extensive disclosures).

However, if bank financing and a nonequity securities public offering are excluded from the material transaction rule, then maybe we need to reconsider why the global bonds issued by Indonesian issuers are not also excluded?  Structurally, global bonds issued by Indonesian issuers are a hybrid of financing and private placement transactions. Despite being issued outside Indonesia, most high-yield bonds are offered through the safe harbor of the Securities Exchange Commission (SEC) registration requirement for entering the United States capital market; that is, a combination of private placements in the US through Rule 144A (that permits the resale of securities only to qualified institutional buyers) and offerings outside of the US in reliance with Regulation S under the United States Securities Act of 1933 (the Securities Act).

Even though it is categorized as a private placement, the global bonds issuance through Rule 144A or Regulation S typically still involves a disclosure letter (only for the issuance through Rule 144A), a legal opinion, extensive due diligence and a professional audit, as well as a standard of disclosure/offering memorandum. In addition, similar to offshore bank financing, any nonbank corporations that issue global bonds must also have a minimum credit rating of BB, issued by a rating agency recognized by Bank Indonesia (BI).

In conclusion, from a credit approval perspective, both the bank in bank financing and the arrangers/initial purchasers in global bonds would have a similar prudential approach prior to the approval of the loan or purchase of bonds. It shows through a series of KYC and credit approval processes done by these organizations to evaluate creditworthiness, size of debt burden, loan size and other factors. In fact, the global bonds require more accurate and sufficient public disclosure in standard of prospectus/offering memorandum, which is not necessary in the case of bank financing.

Lack of details in regulation needs to be clarified as it can potentially create confusion during implementation. For instance, the current material transaction rule tries to account for a series of transactions when calculating the total value of the transactions to equity. If the global bond is issued with a retap structure (i.e. the issuance of additional notes that will form a single series together with the original notes), it is unclear to what extent it will be considered a series of transactions or a stand-alone transaction.

We will view the opinion that the issuance of global bonds should be exempt from this material transaction rule, just like the exemption for bank financing. Perhaps this lack of clarity has occurred because of the rapid development of the financing structure and bonds markets. Nonetheless, the purpose of the regulation should be to encourage investors to invest and to provide easier access for the company to receive financing while preserving the prudence and fairness of the transaction.

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The writer is a managing associate at Melli Darsa & Co., a member firm  of the PricewaterhouseCooper (PwC) global network. The views expressed are her own.

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