Indonesia companies’ weak profits, capital structure heighten distress amid high rates

(Bloomberg) — Nearly one out of every seven sizable, publicly traded Indonesian companies is financially distressed amid weakened profitability and insufficient liquidity, according to a report. 

Financial risk levels remain “high” as post-pandemic weakness lingers, and higher interest rates will worsen their outlook, said the report from corporate restructuring adviser Alvarez & Marsal Inc., released Thursday. 

“The principal driver of distress in Indonesia seems to be weakened balance sheets and capital structures rather than compromised operational performance,” Utsav Garg, the firm’s head of Southeast Asia and Australia, and Alessandro Gazzini, head of Indonesia, wrote in the report, which is based on data from 2019 to 2022 for 360 listed companies with annual revenue of more than $50 million. 

“This situation is particularly concerning, given the current scenario of heightened interest rates which will severely strain any company in need of financing,” they wrote. 

The report didn’t name the companies under duress. Several high-profile restructuring cases have emerged in Indonesia since the pandemic, including flag carrier PT Garuda Indonesia and the largest publicly-listed construction company PT Waskita Karya. 

While a majority of Indonesian companies are financially healthy, the report noted some 19% of companies need to improve their balance sheet and 9% should boost their operating performance.

Indonesian companies’ speed of recovery from distress also is “relatively slow,” resulting in a growing subgroup of “zombie companies,” it said. The report found 44% of distressed companies were still in that state three years later. 

Contributing factors include “resistance to fundamental operational changes, shareholder control retention, creditor reluctance for debt reductions and a less robust legal framework for financial restructuring,” the report said. 

Metal and non-coal mining, retail, transportation and infrastructure as well as construction industries in particular were notably distressed, it said.

Companies’ situations may worsen this year given ongoing conflicts, supply chain disruptions and other challenges, Gazzini told Bloomberg News. Indonesia has been supported by a strong commodity boom, but that is slowing down, he said. 

“I do expect the situation to worsen even though Indonesia is still in a relatively good shape,” Gazzini said. A deep focus on debt, cash position and liquidity will be paramount, he added.

Indonesia’s top construction firms also have seen their debts surge following the country’s infrastructure build-out boom in recent years. 

Companies that face a “maturity wall” in the coming months will find fund access and costs to be “prohibitive and difficult,” said Charles Evans, a senior director at Alvarez & Marsal. They “need to be extremely careful how they navigate the next 18 months.” 

©2024 Bloomberg L.P.


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