Off-Balance-Sheet Items Threaten to Balloon Massive Liabilities of Indonesian Companies

• Published in: The Wall Street journal. Eastern edition
• Main Author: By Erik Guyot and G. Pierre Goad
• Format: Newspaper Article
• Language: English
• Published: New York, N.Y Dow Jones & Company Inc 26.05.1998
• Edition: Eastern edition
• Subjects: American dollar; Bailouts; Banking industry; Bond portfolios; Central banks; Commercial credit; Corporate debt; Currency; Derivatives; Documentation; GDP; Gross Domestic Product; Interest rate swaps; Investment banking; Loans; Off balance sheet items; Indonesia
• ISSN: 0099-9660

The operations of one of the biggest arrangers of Indonesian corporate debt, failed Peregrine Fixed Income Ltd. of Hong Kong, provide a sobering picture of how a firm's off-balance-sheet exposure to Indonesia can be as large or larger than the amount of money that it lent directly to companies in Indonesia. For every $1 that Peregrine lent directly to Indonesian companies, the investment bank had about $10 of foreign-exchange contracts and other derivatives exposure to that country, according to Peregrine documents. What's more, the difficulties that Peregrine's liquidators have encountered in untangling hundreds of currency and other swap contracts with Indonesian counterparties underscore the problems that firms face in collecting from Indonesian companies. Many of Peregrine's Indonesian swap contracts weren't signed by Indonesian counterparties and lack adequate documentation, say Peregrine's liquidators. Peregrine, the largest arranger of foreign bonds and debt securities for Indonesian firms during a borrowing binge that peaked in mid-1997, also provided its clients an array of currency swaps and other derivative products. Before Peregrine's collapse in January, the firm had a total bond portfolio of $1.1 billion, of which $700 million were Indonesian bonds, according to Peregrine documents. In contrast, the Hong Kong-based investment bank's total foreign-exchange contracts and interestrate swaps outstanding before it collapsed were "in the magnitude of" $25 billion, according to Mr. (Simon) Copley. Of that, 38%, or about $9 billion, were contracts with exposure to Indonesia, says the liquidator.