25 Mar 2015
NEW RULES ON THE MANAGEMENT OF OFFSHORE DEBT BY NON-BANK DEBTORS

Bank Indonesia has issued Regulation No. 16/20/PBI/2014 dated 29 October 2014 (“BI Reg 16”) on the application of prudence principles in managing offshore debt taken out by a non-bank debtor (“NBD”). The requirements entail observance of a hedging ratio, a liquidity ratio and a credit rating. Bank Indonesia has also introduced Circular Letter No. 16/24/DKEM dated 30 December 2014 (“Circular 16”) for the implementation of Regulation No 16. Both BI Reg 16 and Circular 16 have been effective since 1 January 2015.

Main Objectives

Pursuant to BI Reg 16, any non-bank corporation (including a state-owned company) that receives an offshore debt in foreign currency must apply prudence principles by meeting minimum hedging levels and observing liquidity ratios and credit ratings that are stipulated in BI Reg 16. The definition is wide and includes debt owed by Indonesian subsidiaries to their foreign parent companies.

BI Reg 16 does not require government approval for incurring offshore debt; instead it imposes reporting obligations based on self-assessment of balance sheet items: the basis for determining the applicable hedging level and liquidity ratio is the amount of “Foreign Exchange Assets” and “Foreign Exchange Liabilities” of any NBD within three to six months after the end of the most recent quarter (i.e. 31 March, 30 June, 30 September and 31 December).

Application of Prudence Principles

The term “offshore debt” itself is defined broadly in BI Reg 16: indebtedness owed by a resident (a person, a legal entity or another entity that is domiciled in Indonesia or plans to be domiciled in Indonesia for at least one year) to a non-resident in foreign or Rupiah currency, and includes Sharia-based debt.

As indicated above, the main component to calculate the hedging level and liquidity ratio of the NBD is the “Foreign Exchange Asset” and “Foreign Exchange Liability”. Please see below further elaboration on both items.

(A) “Foreign Exchange Asset”

“Foreign Exchange Asset” is defined by BI Reg 16 as including asset in foreign exchange that is used in the calculation of hedging and liquidity ratio. Items that is included as foreign exchange asset is stipulated in Circular 16, which consist of cash, giro, deposit, time deposit, receivables, inventory, other marketable securities and receivables in foreign currency which will be calculated based on its position at the end of each quarter.

Receivables are calculated as part of the NBD’s Foreign Exchange Asset, if it fulfills the following requirements:

• trade receivables to both resident and non-resident that will due (i) up to 3 months after the end of the relevant quarter, and/or (ii) more than 3 months up to 6 months after the end of the relevant quarter, that is a onetime deal (jual putus) or non-refundable and after being deducted with provision for impairment,
• the underlying contract or agreement for the receivables must be signed before 1 July 2015 (for receivables to resident). Trade receivables to resident which underlying contract or agreement is signed on and after 1 July 2015 can still be included as component of foreign exchange asset if it relates to strategic infrastructure project.

Circular 16 also stipulates requirement for inventory, marketable securities as well receivables derived from forwards, swaps, and/or option transactions. According to Circular 16, inventory that will be classified as Foreign Exchange Asset is inventory of an exporter corporation that has export income ratio of more than 50% compare to its income in the preceding one year calendar and the value of inventory will exclude equipments and utilities.

(B) “Foreign Exchange Liability”

The term “Foreign Exchange Liability” is defined as liability in foreign currency that is used in calculating the liquidity and hedging ratio, which will include all liability in foreign currency to resident and/or non-resident including liability derived from forward, swap and/or option transaction that will close within three months after the end of the relevant quarter and/or closing between the fourth and the sixth month after the relevant quarter.

In brief, the prudence principles as stipulated in BI Reg 16 must be implemented as follows:

• Hedging Ratio. Each NBD must effectuate a minimum hedging ratio of 25% of the combined negative spread between its Foreign Exchange Assets and its Foreign Exchange Liabilities which will be due (i) within three months after the end of the relevant quarter, and (ii) between the fourth and the sixth month after the end of the relevant quarter.
  
  The hedging ratio must be realized by hedging the foreign exchange against the Rupiah by taking out derivative coverage in the form of a forward, a swap and/or an option.
  
  BI Reg 16 requires that, as of 1 January 2017, the hedging transaction must be done through an Indonesian bank. Hedging transaction that is entered into with an offshore bank before 1 January 2017 will still be acknowledged as Foreign Exchange Assets and used in calculating the minimum liquidity and hedging ratio.
  
  
• Liquidity Ratio. The NBD must meet a minimum liquidity ratio of 70%, calculated by dividing the total value of Foreign Exchange Assets that is available up to three months after the end of the last quarter by the amount of Foreign Exchange Liabilities that are due up to three months after the end of the most recent quarter.
  
  
• Credit Rating. The NBD must have a credit rating (either an issuer credit rating or a debt credit rating) of at least BB- (or equivalent) issued by an authorized Rating Agency that is acknowledged by Bank Indonesia as set out in the Attachment 1 of Circular 16.
  
  The rating may not be older than two years, and obligation to fulfill the credit rating for NBD that enters into offshore debt in foreign currency with its holding company or guaranteed by its holding company can be done using the credit rating of the holding company. For NBD that is just established, obligation to fulfill the credit rating can also initially be fulfilled by using the credit rating of its holding company.

Exemptions

(A)Exemption on Hedging Ratio

The minimum hedging ratio as set out in BI Reg 16 is not applicable for NBD that has its financial recording in US dollars and satisfies the following:

• has export-income ratio of more than 50% of its income in the preceding calendar year, and
• has obtained approval from the Minister of Finance to perform its bookkeeping in US dollars currency.

(B)Exemption on Credit Rating Requirements

There are some limited exemptions for offshore foreign debt for infrastructure projects.

Reporting

Compliance with the prudence principles (including for those that are exempted from the hedging ratio and credit rating requirement) must be reported to Bank Indonesia accompanied by supporting documentation.

Supervision

In supervising compliance with the prudence principles, Bank Indonesia will review and examine submitted reports and supporting documents and if it deemed necessary, Bank Indonesia may (i) require the NBD to provide further explanations, evidence, notes and/or other supporting documents, (ii) conduct direct inspection on the NBD, and/or (iii) appoint an external party to undertake the examination on behalf of Bank Indonesia.

Sanctions

BI Reg 16 provides for comparatively mild sanctions. In line with the territoriality principles that underlie all Bank Indonesia regulations, the foreign creditor does not incur liability for non-compliance.

Any NBD that fails to apply the prudence principles in BI Reg 16 or fails to submit the required report incurs merely an administrative sanction in the form of written warning and payment of fine within the range of Rp. 500,000 up to Rp. 10,000,000 per report.

Effectiveness

BI Reg 16 in its transitional provision provides that the provisions of BI Reg 16 will take effect as of 1 January 2015. However, during the first year after effectiveness, a reduced minimum hedging ratio of 20% and a reduced minimum liquidity ratio of 50% apply. The credit rating requirement will also be applied only to offshore debt that is signed or issued on and after 1 January 2016, and the imposition of sanction under BI Reg 16 and PBI No. 16/22/2014 will only commence as of the submission of reports for the third calendar quarter of 2015 (except for sanction that relates to credit rating which will only be applicable for offshore debt that is signed or issued on and after 1 January 2016). (by: Theodoor Bakker & Elsie F. Hakim)