Why is Deutsche Bank in court?
German bank in the dock as years of legal wrangling about the ownership of IndonesiaÆs Adaro coalmines finally makes it to the High Court of Singapore.
A court case opened in Singapore last week, which is fast providing one of the most ironic and contentious tailpieces to the Asian financial crisis. Over the past nine years, there have been endless legal battles between indebted Asian companies and their creditors over debt restructuring agreements and asset disposals.
In this instance the situation reverses itself with a highly novel twist. Here one of the worldÆs leading global banks has been forced to take the stand and faces a possible loss of reputation not to mention the payment of damages if it loses. Two of IndonesiaÆs most prominent and controversial businessmen have accused it of acting in conspiracy with a third equally prominent local businessman and their own management team to sell a highly valuable asset they are determined to get back.
Deutsche, meanwhile, is counterclaiming for the full amount plus interest it is still owed on the loan to the two businessmen.
The disputed ownership of a 40% equity stake in IndonesiaÆs largest coal mine has been ongoing since the beginning of 2002 and is one of those colourful stories that has just about everything: a prized asset whose sale price has soared ten-fold in the space of four years; packs of lawyers and PR agencies fighting to put their clientÆs view across and muddy the reputation of their opponents; endless legal battles over what documentation Deutsche should disclose; threats of intimidation and harassment, not to mention a dispute between two of the Indonesian businessmen in question after they met in a Singapore coffee shop.
In some ways it is shaping up to be AsiaÆs own version of Jarndyce versus Jarndyce, the interminable law suit at the heart of Charles Dickens classic novel Bleak House.
Complicating the matter further is the fact that the Adaro coal mines were partially re-sold in 2005 via a groundbreaking leveraged acquisition that involves some of the worldÆs smartest private equity investors and hedge funds including Goldman Sachs, Farallon Capital Partners and SingaporeÆs GIC. Subsequent to this leveraged acquisition came a high yield bond deal, which was judged FinanceAsiaÆs bond deal of the year in 2005.
Why then is this court case so important if the two sides have been battling it out since 2002? What are the implications for the leveraged acquisition and bondholders of AdaroÆs $400 million 2010 bond deal if the plaintiff wins? What does this court case reveal about the way international banks operate in a country where the legal system has consistently been found wanting? What does it say about the way prominent local business groups conduct themselves and the ethics they uphold?
The plaintiff in the legal action is Beckett Pte Ltd, a Singapore registered entity ultimately owned by three groups via a vehicle called ASMEC. The three comprise: Raja Garuda Mas (RGM) headed by Indonesian pulp and paper tycoon Sukanto Tanoto; Tirtamas, headed by Hashim Djojohadikusumo an associate of disgraced president Suharto and former owner of cement producer Semen Cibinong and; Indopac, owned by Graeme Robertson, an Australian who took up Indonesian citizenship and was also President Director of Adaro itself.
The defendants are Deutsche Bank and PT Dianlia Setyamukti. The latter is an Indonesian company headed by Edwin Soeryadjaya, son of Astra founder William Soeryadjaya, his cousin TP Rachmat, a former Astra CEO and associates Benny Subianto and Garibaldi Boy Tohir, who owns the Republika newspaper.
At the heart of the dispute is a $100 million bridging loan extended by Deutsche Bank in October 1997 to a company called Asminco. This latter company owned a 15% stake in PT Adaro and took out the loan in order to fund a share purchase that increased its ownership to 40%.
The guarantor of the loan was Beckett, which owned Asminco and pledged all 40% of its shares as collateral. The complicated shareholding structure of Adaro at the time of the bridge loan is illustrated in table 1. The companies are henceforth often described as the Swabara group of companies owned by ASMEC.
In May 1998, Asminco defaulted on the loan. Given that it was at the height of the financial crisis, Deutsche Bank was unsurprisingly unable to provide take-out financing in the form of a syndicated loan or CB and Asminco did not re-pay it. Over the next three years a number of standstill agreements were concluded whereby Deutsche Bank did not foreclose on the loan and restructuring negotiations took place. The last of these standstill agreements expired in June 2001 with no restructuring agreement in place.
In February 2002, Deutsche informed Beckett it had foreclosed on the loan and sold the pledged shares. Fair enough you might think. This represents a rare instance where an international bank has actually been able to realize collateral in a country where it has proved extremely hard to uphold creditors rights in the aftermath of the financial crisis. Indeed some specialists believe this is the only instance where an international bank has been able to successfully foreclose on an asset like this in Indonesia.
One of the key issues muddying the case is which legal system should be applied. The syndicated loan was signed in Singapore and is subject to Singapore law and British common law, which is superimposed on top of it. The assets were in Indonesia and subject to Indonesian law. Deutsche says it adhered to both Singapore and Indonesian law. Beckett claims it broke Indonesian law and did not adhere to key tenets of common law
DeutscheÆs Defence
In his affidavit to the Singapore High Court, Deutsche managing director Wolfgang Topp says Deutsche was well within its rights to sell the pledged shares once the loan was in default. He argues that Deutsche was not legally bound to inform Beckett it was doing so and that it was up to Deutsche what price the shares were sold at û ie what haircut DB would have to take on its $100 million loan.
Topp is DBÆs head of Asian credit risk management workout and the man who handled the disposal of the 40% stake. In his affidavit, he cites the share pledge agreement, which states that,
ôIf an event of default has occurred, the bank may, without demand for payment or notice of intention and without obtaining any decree, order or authorization of any court, all of which the shareholder hereby and irrevocably and unconditionally waives, immediately or at any other times as the bank shall in its sole discretion determine sell all or any part of the pledged collateral at a public sale or privately at such price and upon such terms and conditions as the bank shall in its sole discretion determine.ö
Topp spells out at some length the efforts Deutsche undertook to try and restructure the loan between 1998 and 2002. His evidence revolves around two crucial meetings, which he says took place as matters came to a head in the year before the shares were eventually sold.
The first was in December 2000 and attended by Sukanto TanotoÆs representative Arthur Ling. In his affidavit, Topp says he was told AsmincoÆs respective shareholders would not agree to any restructuring which, ôwould create a direct financial burden on Adaro, or capture directly AdaroÆs cash flow.ö
Topp says he was also told the shareholders had no funds to service the Asminco loan other than dividends they would receive from Adaro. At best these would only cover the monthly interest payments and none of the principal.
ôIt appeared to me AsmincoÆs shareholders were out to play hardball with the bank,ö Topp reflects. In order to avoid a complete breakdown of negotiations, Topp says he insisted on the appointment of an independent financial advisor to advise on the future cash flows of Asminco, which would be used to service the loan. He says everyone agreed, leading to the appointment of Deloitte Touche Tohmatsu and an extension of the standstill agreement for a further six months until June 2001.
In May 2001, Deloitte presented its findings. These stated that in a base case scenario, Asminco would have available cash flow of $96 million over 13 years for debt servicing. Topp says he used this figure to calculate the Net Present Value (NPV) of Asminco and came out with a figure of $38 million û based on a conservative discount rate of 13%.
He concluded that AsmincoÆs ability to service the loan was weak and that he was not confident funds would come from another source given the shareholders had said there would be none from them. Moreover, he adds that, ôconstant promises of impending investments by third party investorsà. remained empty promises.ö
By this point, Deutsche says it had also received a letter from Asminco stating that no dividends would be forthcoming in the second quarter of 2001 because of cash-flow problems at Adaro. Deutsche then called a meeting in June at which TanotoÆs representative Arthur Ling was also said to have been present. Topp says he asked Ling whether the shareholders would be willing to give up their pledged shares given they could not service the loan.
In his affidavit he relates, ôArthur gave a categorical æNoÆ. They were not willing to give up their shares. Arthur then told me the bank could try and take action on the security if it wished, but the shareholders would not give up the shares. It was effectively a challenge issued to the bank to try and enforce its security over the shares if it wished.ö
Topp then says, ôAt this point, I told all present that in view of the position taken by the shareholders, the bank would henceforth take whatever necessary steps to enforce its legal rights.ö
He goes on to say that he thought the bankÆs position was bleak given the loan had been in default for more than two-and-a-half years with no indication of how or when the borrower/pledgors would re-pay it, or even begin to re-service it.
Within five months of the June meeting, the 40% stake had been sold to PT Dianlia Setyamukti for $46 million. DeutscheÆs view is that 46 cents on the dollar was a good price given the average recovery price for distressed debts at that time was more like 24 cents.
Today the stake is estimated to be worth more than $400 million.
When it informed Beckett shareholders of the stake sale in February 2002, Deutsche refused to disclose the amount it had sold the shares for and to whom. Deutsche says it had a number of very valid reasons for not informing the shareholders either before or immediately after the sale.
First and foremost Topp says he knew they would try and ôjam up the saleö by resorting to the Indonesian courts. Secondly he says he was concerned any publicity leading up to a sale would create firesale conditions and depress the eventual price Deutsche received.
This factor was compounded by two further difficulties. Firstly the stake did not involve majority control and secondly it needed to be sold to an Indonesian entity.
The latter issue relates to the countryÆs Indonesiation policy. This required that 51% of the Adaro mine had to be majority owned by Indonesians by October 2002.
At the time of the June meeting, the shareholding structure of Adaro was such that an Australian publicly listed company New Hope owned 50%, AmericaÆs Mission Energy 10% and Beckett 40%. Adaro President Director Graeme Robertson was also a managing director of New Hope.
In September this changed. New Hope is said to have sold 9.17% of the company and Mission Energy sold 1.83% to PT Harapan Insani. This is a company said to be headed by Indra Aman, who was also general legal counsel to the Swabara group of companies, which included Adaro and Asminco.
The PlaintiffÆs Case
BeckettÆs case, outlined in an opening statement by barrister Steven Chong, paints a different picture. Beckett argues that the pledged shares were governed by Indonesian law and notwithstanding the share pledge agreement in Singapore, Deutsche breached articles 1155 and 1156 of the Indonesian Civil Code when it executed its rights in Indonesia and sold them to PT Dianlia.
Beckett says Deutsche had two options in exercising its rights over the pledged shares. It could have sold them publicly, in which case it would not need a writ of execution from an Indonesian court. Or it could have sold them privately û the course of action it did take.
However, a private sale necessitated a writ of execution from an Indonesian court and Beckett argues that Deutsche only applied for such a ruling after the sale had actually taken place. According to BeckettÆs version of events, the Sale and Purchase Agreement was signed on November 21 2001 and the final court ruling was granted in February 2002. Furthermore, Beckett argues that such a ruling should not have been granted on an ex-parte basis (only DB in attendance), but on an inter-parte basis (both DB and Beckett in attendance).
The High Court of Jakarta agreed with Beckett after conducting the hearing on an ex-parter basis and in February 2005 it cancelled the South Jakarta court decrees, declaring them null and void. It did so on the basis that a lower court cannot make rulings on property rights on an ex-parte basis.
This had two results. Firstly, the South Jakarta court cancelled its earlier decrees and secondly Deutsche appealed. The German bank says the first it knew of the High Court case was after it had been concluded. The issue is now before IndonesiaÆs Supreme Court.
In addition to breaches of Indonesian law, Beckett also argues that the stake sale breached common law, the British system, which is still applied in Singapore. It interprets this as a duty to act in good faith and take all possible steps to get a good price.
This is another key point of the case because Beckett believes there was a conspiracy between AdaroÆs management team, Deutsche and PT Dianlia to sell the shares at a fraction of their real worth to a consortium that included members of the management team.
In his opening statement, Chong says, ôAt its core, the case is relatively straightforward. It will be amply demonstrated from the evidence that Deutsche Bank à collaborated with a rival faction of the borrower to sell the pledged shares at an undervalue to a ôborrower related entityö to the prejudice of the guarantor and pledgor of the shares, Beckett.ö
Elements of this conspiracy are frequently mentioned throughout ChongÆs opening statement. In essence, BeckettÆs two so-called ôpassiveö shareholders (Sukanto Tanoto and Hashim Djojohadikusumo) believe there had always been enough cash to service the loan properly. They argue they were not fully aware of this at the time because the management team was withholding financial information from them and they had not been taking part in the restructuring negotiations until towards the end.
They further believe the management groupÆs actions were the direct result of æfinancial mismanagement,Æ which the two shareholders were in the process of investigating at the time of the share sale. In ChongÆs opening statement they say that when they realized what was happening they took steps to remove the management group as shareholders of ASMEC (the ultimate owner of Beckett). The management group had applied for an injunction blocking the move in November 2001, which failed.
The ASMEC board then tried to remove the management team from the board of Swabara Mining and Energy (SME). Beckett owned a 74.2% stake in this company, which owned 99.98% of Asminco. This failed after Graeme Robertson used his 15.8% direct stake in SME to obtain an injunction preventing Beckett from convening the meeting.
Beckett alleges that the management group believed the best way to ôhalt all investigations into financial mismanagementö was to sell the pledged shares and wind the guarantor (Beckett) up. Beckett alleges the management group acted in conspiracy with PT Dianlia and Deutsche to buy the shares.
To back up its claims, Beckett cites a document it obtained from Deutsche Bank after the latter lost its appeal on Friday to prevent the document from being disclosed.
The court transcript says that, ôCounsel for Beckett pointed out to the Court of Appeal that the documents revealed that most of the funding for DSMÆs (PT Dianlia) $46 million purchase of the shares from Deutsche Bank appeared to have come from a $40 million loan obtained by Adaro from Bank Mandiri. That loan, which was obtained by Adaro, appeared to have been on-lent to DSM as an interest free loan. The documents revealed that the $40 million interest-free loan from Adaro to DSM was described as a ænon-commercialÆ arrangement.ö
Beckett also disputes DeutscheÆs valuation methodology for the shares. When the original bridge loan was signed in 1997, it says Deutsche valued the 40% stake at an aggregate sum of $297.7 million. In 2000, it adds that a company called Rheinbraun made an offer to buy 100% of Adaro for $650 million. Further in December 2000, Beckett says Deutsche had assigned an internal valuation of $785 million.
In his opening statement, Chong also cites numerous emails and correspondence between Indra Aman (a member of the management group) and Deutsche that he says point to evidence of a conspiracy.
ôIndra Aman orchestrated the entire sequence of events surrounding the enforcement of the pledged shares,ö Chong says in his opening statement. ôHe drafted a total of 10 letters pursuant to the conspiracy script detailing each step to be taken by Deutsche Bank and Asminco to give the misleading impression that the sale was above board. Indra Aman even drafted the letter of demand for Deutsche Bank to send out to Asminco to trigger the default. Interestingly the script ended with an instruction to, ôà..erase and destroy all files and correspondence on the transaction at the latest one day before completion.ö
In his affidavit, Topp says he was aware of an internal dispute between the shareholders, but believes it was nothing to do with Deutsche. ôMy impression was that Edwin (Soeryadjaya) was interested in purchasing the pledged shares for his own benefit and was not fronting the negotiations for a third party,ö he says. ôManagement was friendly to him and rendered their assistance, but I certainly did not form the impression that management were buying the shares for themselves.ö
The bank also denies negotiating directly with Indra Aman and says his involvement was to facilitate the transfer of shares and prepare the necessary documentation.
Neither Indra Aman nor Graeme Robertson are likely to present evidence in court, which means the management groupÆs view of the dispute is unlikely to be heard in any depth.
Disclosure of Documents
Within three months of being told about the sale of the pledged shares, Beckett had commenced legal action in the High Court of Singapore. In May 2002, it filed an originating summons against Deutsche for pre-discovery disclosure. Since then, it says the action has been subject to more than 30 interlocutory applications of which seven relate to discovery applications for documents.
Having procured documentation from Deutsche as a result of its various court orders, Beckett says it felt able to file a statement of claim against the German bank in April 2004. In this statement of claim, it alleged that Deutsche had breached its duties as mortgagee for the sale of the pledged shares at gross undervalue.
It then sought further court orders for the release of additional documents and in February 2005 it applied to add PT Dianlia as a second defendant in the case. It says it did so after the procurement of new documents pointed to evidence of a conspiracy.
It firmly refutes any suggestion that it only began to seek the pledged shares back after coal prices soared and the stakeÆs value became apparent. Beckett contends it has been fighting to regain the stake from the moment it knew it had been sold. It says the time lag between the November 2001 Sale and Purchase Agreement and the current Singapore trial is the result of difficulties obtaining the relevant documents to back up its case.
At the time the original operating summons was filed in May 2002, for example, coal prices were still falling (see table two).
Deutsche says it has been reluctant to hand over documents for two reasons. Firstly, it is concerned that employees mentioned in certain documents may be subject to harassment and intimidation in Indonesia. ToppÆs affidavit cites a number of incidents, which resulted in one bank employee refusing to provide an affidavit for fear of his personal safety.
Secondly Deutsche says it believes many of the requested documents were not relevant. Topp refutes BeckettÆs allegations that Deutsche consistently breached its court-ordered discovery obligations. ôI take offence at BeckettÆs scandalous allegationö he says in the affidavit. ôThe negotiations with DSM for the sale of the shares were done orally. It was a deal, which moved fast and we were at the negotiating table over a few meetings. No minutes were kept for these meetings.ö
Deutsche BankÆs head of Asian corporate communications, Mike West, also adds that, ôDeutsche Bank strongly contested the relevance of some documents requested. The court ruled in DeutscheÆs favour in some instances and in BeckettÆs in others. All relevant documents are before the High Court.ö
Beckett of course sees it somewhat differently. In his opening statement, barrister Chong concludes that DeutscheÆs, ôcontumelious failure and/or refusal to provide proper discovery is due to their recognition that the documents, if disclosed, will advance BeckettÆs claims and damage their defense. There can be no other plausible explanation.ö
The LBO
Three years into the court wrangling, Adaro was subject to a $973.5 million quasi LBO (leveraged buy-out) of a kind that had never happened in Indonesia before and is only just beginning to gain traction in the wider Asian region thanks to the increasing activity of private equity and hedge funds.
Prior to this in 2003, the 11% stake held by PT Harapan Insani had been sold to PT Dianlia for an undisclosed sum. The June 2005 acquisition saw Graeme RobertsonÆs New Hope divest its 40.8% stake as well for $378 million.
The LBO was funded via a $600 million senior credit facility, a $353.6 million mezzanine facility and a $50 million equity injection from the Soeryadjaya and Rachmat groups, which owned Dianlia. This allowed the latter two to increase their overall stake from 51% to a beneficial holding of 64%.
A group of international investors acquired the remaining 36%. This latter group comprises: Noonday Asset management (a sub advisor of Farallon Capital Management); GIC Special Investments; Kerry Coal (a member of the Kuok group) and the private equity arms of Goldman Sachs and Citigroup.
The international investors also own the mezzanine facility. This affords them equity conversion rights subject to an event of default under the mezzanine facility, or on scheduled quarterly dates after June 22 2015. The exact percentage of equity that full conversion would entail is not public knowledge.
As a result of the LBO, the disputed pledged shares purchased by Dianlia in 2001 now represent just 4.58% of the total issued and outstanding shares of Adaro. Indeed, Beckett believes the main rationale for the LBO was to dilute the Dianlia stake and make it difficult for Beckett to re-claim it in the event of a successful court case.
In his opening statement Chong states, ôAs if realizing the inevitable outcome of the present proceedings, DSM have undertaken several financial transactions to dilute the value of the pledged shares. They have effectively mortgaged the pledged shares to the hilt in a much publicized LBO.ö
Unsurprisingly, the Beckett shareholders attempted to block the LBO in both Singapore and Indonesia. Injunctions in both countries failed.
Beckett believes the Indonesian injunction failed because the High Court of Singapore would not grant it leave to use documents procured from Deutsche. Chong says the application was, ôsuccessfully opposed by Deutsche Bank on the grounds that the documents might expose them to criminal prosecution in Indonesia.ö
As a result, Beckett says it turned to the Singapore courts to block the sale. In his opening statement Chong says the, ôinjunction was ultimately not granted because the court found that the injunction will not be necessary to protect or preserve BeckettÆs rights to claim back the pledged shares. The Court of Appeal observed, æIn addition notices were also inserted by Beckett in the major Indonesian newspapers warning the public of its interest in the pledged shares. A purchaser of the Adaro shares with notice of BeckettÆs interest to them would not, vis-a-vis Beckett, possess any better title to those shares than DSM and that transaction may be set asideÆ.ö
Consequences
So where does that now leave the LBO and the subsequent high yield bond? The 2010 high yield bond has a change of control put option, which enables bondholders to put the bonds at 101% of their principal amount, plus accrued and unpaid interest.
In the bondÆs offering memorandum it says that Adaro believes the lawsuit stands little chance of success. But it adds that, ôIf there is an adverse decision, in addition to possible required payment of damages substantially all of DianliaÆs Adaro or IBT shares may be needed to be restored in favour of the Claimant in which case the shares may not be available to secure the notes and the note guarantees and this could also result in a change of control.ö
So far the performance of the bond issue has not been affected by the court case. The five-year deal was priced in early December at 99.005% on a coupon of 8.5% to yield 8.75% or 430bp over Treasuries. As of last Friday it was bid at 7.731%.
Clearly a 40% stake does not constitute a change of management control, but were the Plaintiffs able to reclaim their equity interest in full then this would unwind the LBO, which would trigger an event of default for the bond.
Where the LBO is concerned, much depends on a Singapore courtÆs ability to enforce a ruling over Indonesian based assets.
This may result in one or both of two options. Beckett is seeking the full restoration of its 40% stake. But it says that, ôin the event that Deutsche Bank and/or DSM are unable to procure the restoration of equity to their original respective percentages, Beckett will be seeking a claim for damages to be assessed by reference to the present market value of the shares in their original percentages.ö
Based on the NPV of the equity stake at the time of the LBO just under a year ago, this would amount to around $400 million. Similarly, if Deutsche is successful in its claim against Beckett, then the latter would be liable for up to $110 million in unpaid interest and outstanding principal.
Beckett may also choose to follow up a Singapore court case with a new civil action, or criminal case in Indonesia. Deutsche certainly seems to think this is likely. In his affidavit, Topp concludes, ôBased on BeckettÆs conduct, I have reason to strongly believe that Beckett would file an action in Indonesia again the Bank after the conclusion of this proceedings, whatever ruling this Honourable Court may make.ö
Sukanto Tanoto and Hashim Djojohadikusumo have shown considerable determination in trying to wrest back their 40% stake. As such, it is a saga that seems likely to run on and on.
As Charles Dickens once so eloquently put it when describing Jarndyce versus Jarndyce, ôThis scarecrow of a suit has, in the course of time, become so complicated that no man alive knows what it means.ö And perhaps the true meaning of DickensÆ legal case should give all parties in the Adaro case pause for thought. Its moral is this: that Jarndyce versus Jarndyce went on for so many years it practically ruined of all those involved.
A fuller version of this story is scheduled to appear in the March issue of FinanceAsia Magazine.
In this instance the situation reverses itself with a highly novel twist. Here one of the worldÆs leading global banks has been forced to take the stand and faces a possible loss of reputation not to mention the payment of damages if it loses. Two of IndonesiaÆs most prominent and controversial businessmen have accused it of acting in conspiracy with a third equally prominent local businessman and their own management team to sell a highly valuable asset they are determined to get back.
Deutsche, meanwhile, is counterclaiming for the full amount plus interest it is still owed on the loan to the two businessmen.
The disputed ownership of a 40% equity stake in IndonesiaÆs largest coal mine has been ongoing since the beginning of 2002 and is one of those colourful stories that has just about everything: a prized asset whose sale price has soared ten-fold in the space of four years; packs of lawyers and PR agencies fighting to put their clientÆs view across and muddy the reputation of their opponents; endless legal battles over what documentation Deutsche should disclose; threats of intimidation and harassment, not to mention a dispute between two of the Indonesian businessmen in question after they met in a Singapore coffee shop.
In some ways it is shaping up to be AsiaÆs own version of Jarndyce versus Jarndyce, the interminable law suit at the heart of Charles Dickens classic novel Bleak House.
Complicating the matter further is the fact that the Adaro coal mines were partially re-sold in 2005 via a groundbreaking leveraged acquisition that involves some of the worldÆs smartest private equity investors and hedge funds including Goldman Sachs, Farallon Capital Partners and SingaporeÆs GIC. Subsequent to this leveraged acquisition came a high yield bond deal, which was judged FinanceAsiaÆs bond deal of the year in 2005.
Why then is this court case so important if the two sides have been battling it out since 2002? What are the implications for the leveraged acquisition and bondholders of AdaroÆs $400 million 2010 bond deal if the plaintiff wins? What does this court case reveal about the way international banks operate in a country where the legal system has consistently been found wanting? What does it say about the way prominent local business groups conduct themselves and the ethics they uphold?
The plaintiff in the legal action is Beckett Pte Ltd, a Singapore registered entity ultimately owned by three groups via a vehicle called ASMEC. The three comprise: Raja Garuda Mas (RGM) headed by Indonesian pulp and paper tycoon Sukanto Tanoto; Tirtamas, headed by Hashim Djojohadikusumo an associate of disgraced president Suharto and former owner of cement producer Semen Cibinong and; Indopac, owned by Graeme Robertson, an Australian who took up Indonesian citizenship and was also President Director of Adaro itself.
The defendants are Deutsche Bank and PT Dianlia Setyamukti. The latter is an Indonesian company headed by Edwin Soeryadjaya, son of Astra founder William Soeryadjaya, his cousin TP Rachmat, a former Astra CEO and associates Benny Subianto and Garibaldi Boy Tohir, who owns the Republika newspaper.
At the heart of the dispute is a $100 million bridging loan extended by Deutsche Bank in October 1997 to a company called Asminco. This latter company owned a 15% stake in PT Adaro and took out the loan in order to fund a share purchase that increased its ownership to 40%.
The guarantor of the loan was Beckett, which owned Asminco and pledged all 40% of its shares as collateral. The complicated shareholding structure of Adaro at the time of the bridge loan is illustrated in table 1. The companies are henceforth often described as the Swabara group of companies owned by ASMEC.
In May 1998, Asminco defaulted on the loan. Given that it was at the height of the financial crisis, Deutsche Bank was unsurprisingly unable to provide take-out financing in the form of a syndicated loan or CB and Asminco did not re-pay it. Over the next three years a number of standstill agreements were concluded whereby Deutsche Bank did not foreclose on the loan and restructuring negotiations took place. The last of these standstill agreements expired in June 2001 with no restructuring agreement in place.
In February 2002, Deutsche informed Beckett it had foreclosed on the loan and sold the pledged shares. Fair enough you might think. This represents a rare instance where an international bank has actually been able to realize collateral in a country where it has proved extremely hard to uphold creditors rights in the aftermath of the financial crisis. Indeed some specialists believe this is the only instance where an international bank has been able to successfully foreclose on an asset like this in Indonesia.
One of the key issues muddying the case is which legal system should be applied. The syndicated loan was signed in Singapore and is subject to Singapore law and British common law, which is superimposed on top of it. The assets were in Indonesia and subject to Indonesian law. Deutsche says it adhered to both Singapore and Indonesian law. Beckett claims it broke Indonesian law and did not adhere to key tenets of common law
DeutscheÆs Defence
In his affidavit to the Singapore High Court, Deutsche managing director Wolfgang Topp says Deutsche was well within its rights to sell the pledged shares once the loan was in default. He argues that Deutsche was not legally bound to inform Beckett it was doing so and that it was up to Deutsche what price the shares were sold at û ie what haircut DB would have to take on its $100 million loan.
Topp is DBÆs head of Asian credit risk management workout and the man who handled the disposal of the 40% stake. In his affidavit, he cites the share pledge agreement, which states that,
ôIf an event of default has occurred, the bank may, without demand for payment or notice of intention and without obtaining any decree, order or authorization of any court, all of which the shareholder hereby and irrevocably and unconditionally waives, immediately or at any other times as the bank shall in its sole discretion determine sell all or any part of the pledged collateral at a public sale or privately at such price and upon such terms and conditions as the bank shall in its sole discretion determine.ö
Topp spells out at some length the efforts Deutsche undertook to try and restructure the loan between 1998 and 2002. His evidence revolves around two crucial meetings, which he says took place as matters came to a head in the year before the shares were eventually sold.
The first was in December 2000 and attended by Sukanto TanotoÆs representative Arthur Ling. In his affidavit, Topp says he was told AsmincoÆs respective shareholders would not agree to any restructuring which, ôwould create a direct financial burden on Adaro, or capture directly AdaroÆs cash flow.ö
Topp says he was also told the shareholders had no funds to service the Asminco loan other than dividends they would receive from Adaro. At best these would only cover the monthly interest payments and none of the principal.
ôIt appeared to me AsmincoÆs shareholders were out to play hardball with the bank,ö Topp reflects. In order to avoid a complete breakdown of negotiations, Topp says he insisted on the appointment of an independent financial advisor to advise on the future cash flows of Asminco, which would be used to service the loan. He says everyone agreed, leading to the appointment of Deloitte Touche Tohmatsu and an extension of the standstill agreement for a further six months until June 2001.
In May 2001, Deloitte presented its findings. These stated that in a base case scenario, Asminco would have available cash flow of $96 million over 13 years for debt servicing. Topp says he used this figure to calculate the Net Present Value (NPV) of Asminco and came out with a figure of $38 million û based on a conservative discount rate of 13%.
He concluded that AsmincoÆs ability to service the loan was weak and that he was not confident funds would come from another source given the shareholders had said there would be none from them. Moreover, he adds that, ôconstant promises of impending investments by third party investorsà. remained empty promises.ö
By this point, Deutsche says it had also received a letter from Asminco stating that no dividends would be forthcoming in the second quarter of 2001 because of cash-flow problems at Adaro. Deutsche then called a meeting in June at which TanotoÆs representative Arthur Ling was also said to have been present. Topp says he asked Ling whether the shareholders would be willing to give up their pledged shares given they could not service the loan.
In his affidavit he relates, ôArthur gave a categorical æNoÆ. They were not willing to give up their shares. Arthur then told me the bank could try and take action on the security if it wished, but the shareholders would not give up the shares. It was effectively a challenge issued to the bank to try and enforce its security over the shares if it wished.ö
Topp then says, ôAt this point, I told all present that in view of the position taken by the shareholders, the bank would henceforth take whatever necessary steps to enforce its legal rights.ö
He goes on to say that he thought the bankÆs position was bleak given the loan had been in default for more than two-and-a-half years with no indication of how or when the borrower/pledgors would re-pay it, or even begin to re-service it.
Within five months of the June meeting, the 40% stake had been sold to PT Dianlia Setyamukti for $46 million. DeutscheÆs view is that 46 cents on the dollar was a good price given the average recovery price for distressed debts at that time was more like 24 cents.
Today the stake is estimated to be worth more than $400 million.
When it informed Beckett shareholders of the stake sale in February 2002, Deutsche refused to disclose the amount it had sold the shares for and to whom. Deutsche says it had a number of very valid reasons for not informing the shareholders either before or immediately after the sale.
First and foremost Topp says he knew they would try and ôjam up the saleö by resorting to the Indonesian courts. Secondly he says he was concerned any publicity leading up to a sale would create firesale conditions and depress the eventual price Deutsche received.
This factor was compounded by two further difficulties. Firstly the stake did not involve majority control and secondly it needed to be sold to an Indonesian entity.
The latter issue relates to the countryÆs Indonesiation policy. This required that 51% of the Adaro mine had to be majority owned by Indonesians by October 2002.
At the time of the June meeting, the shareholding structure of Adaro was such that an Australian publicly listed company New Hope owned 50%, AmericaÆs Mission Energy 10% and Beckett 40%. Adaro President Director Graeme Robertson was also a managing director of New Hope.
In September this changed. New Hope is said to have sold 9.17% of the company and Mission Energy sold 1.83% to PT Harapan Insani. This is a company said to be headed by Indra Aman, who was also general legal counsel to the Swabara group of companies, which included Adaro and Asminco.
The PlaintiffÆs Case
BeckettÆs case, outlined in an opening statement by barrister Steven Chong, paints a different picture. Beckett argues that the pledged shares were governed by Indonesian law and notwithstanding the share pledge agreement in Singapore, Deutsche breached articles 1155 and 1156 of the Indonesian Civil Code when it executed its rights in Indonesia and sold them to PT Dianlia.
Beckett says Deutsche had two options in exercising its rights over the pledged shares. It could have sold them publicly, in which case it would not need a writ of execution from an Indonesian court. Or it could have sold them privately û the course of action it did take.
However, a private sale necessitated a writ of execution from an Indonesian court and Beckett argues that Deutsche only applied for such a ruling after the sale had actually taken place. According to BeckettÆs version of events, the Sale and Purchase Agreement was signed on November 21 2001 and the final court ruling was granted in February 2002. Furthermore, Beckett argues that such a ruling should not have been granted on an ex-parte basis (only DB in attendance), but on an inter-parte basis (both DB and Beckett in attendance).
The High Court of Jakarta agreed with Beckett after conducting the hearing on an ex-parter basis and in February 2005 it cancelled the South Jakarta court decrees, declaring them null and void. It did so on the basis that a lower court cannot make rulings on property rights on an ex-parte basis.
This had two results. Firstly, the South Jakarta court cancelled its earlier decrees and secondly Deutsche appealed. The German bank says the first it knew of the High Court case was after it had been concluded. The issue is now before IndonesiaÆs Supreme Court.
In addition to breaches of Indonesian law, Beckett also argues that the stake sale breached common law, the British system, which is still applied in Singapore. It interprets this as a duty to act in good faith and take all possible steps to get a good price.
This is another key point of the case because Beckett believes there was a conspiracy between AdaroÆs management team, Deutsche and PT Dianlia to sell the shares at a fraction of their real worth to a consortium that included members of the management team.
In his opening statement, Chong says, ôAt its core, the case is relatively straightforward. It will be amply demonstrated from the evidence that Deutsche Bank à collaborated with a rival faction of the borrower to sell the pledged shares at an undervalue to a ôborrower related entityö to the prejudice of the guarantor and pledgor of the shares, Beckett.ö
Elements of this conspiracy are frequently mentioned throughout ChongÆs opening statement. In essence, BeckettÆs two so-called ôpassiveö shareholders (Sukanto Tanoto and Hashim Djojohadikusumo) believe there had always been enough cash to service the loan properly. They argue they were not fully aware of this at the time because the management team was withholding financial information from them and they had not been taking part in the restructuring negotiations until towards the end.
They further believe the management groupÆs actions were the direct result of æfinancial mismanagement,Æ which the two shareholders were in the process of investigating at the time of the share sale. In ChongÆs opening statement they say that when they realized what was happening they took steps to remove the management group as shareholders of ASMEC (the ultimate owner of Beckett). The management group had applied for an injunction blocking the move in November 2001, which failed.
The ASMEC board then tried to remove the management team from the board of Swabara Mining and Energy (SME). Beckett owned a 74.2% stake in this company, which owned 99.98% of Asminco. This failed after Graeme Robertson used his 15.8% direct stake in SME to obtain an injunction preventing Beckett from convening the meeting.
Beckett alleges that the management group believed the best way to ôhalt all investigations into financial mismanagementö was to sell the pledged shares and wind the guarantor (Beckett) up. Beckett alleges the management group acted in conspiracy with PT Dianlia and Deutsche to buy the shares.
To back up its claims, Beckett cites a document it obtained from Deutsche Bank after the latter lost its appeal on Friday to prevent the document from being disclosed.
The court transcript says that, ôCounsel for Beckett pointed out to the Court of Appeal that the documents revealed that most of the funding for DSMÆs (PT Dianlia) $46 million purchase of the shares from Deutsche Bank appeared to have come from a $40 million loan obtained by Adaro from Bank Mandiri. That loan, which was obtained by Adaro, appeared to have been on-lent to DSM as an interest free loan. The documents revealed that the $40 million interest-free loan from Adaro to DSM was described as a ænon-commercialÆ arrangement.ö
Beckett also disputes DeutscheÆs valuation methodology for the shares. When the original bridge loan was signed in 1997, it says Deutsche valued the 40% stake at an aggregate sum of $297.7 million. In 2000, it adds that a company called Rheinbraun made an offer to buy 100% of Adaro for $650 million. Further in December 2000, Beckett says Deutsche had assigned an internal valuation of $785 million.
In his opening statement, Chong also cites numerous emails and correspondence between Indra Aman (a member of the management group) and Deutsche that he says point to evidence of a conspiracy.
ôIndra Aman orchestrated the entire sequence of events surrounding the enforcement of the pledged shares,ö Chong says in his opening statement. ôHe drafted a total of 10 letters pursuant to the conspiracy script detailing each step to be taken by Deutsche Bank and Asminco to give the misleading impression that the sale was above board. Indra Aman even drafted the letter of demand for Deutsche Bank to send out to Asminco to trigger the default. Interestingly the script ended with an instruction to, ôà..erase and destroy all files and correspondence on the transaction at the latest one day before completion.ö
In his affidavit, Topp says he was aware of an internal dispute between the shareholders, but believes it was nothing to do with Deutsche. ôMy impression was that Edwin (Soeryadjaya) was interested in purchasing the pledged shares for his own benefit and was not fronting the negotiations for a third party,ö he says. ôManagement was friendly to him and rendered their assistance, but I certainly did not form the impression that management were buying the shares for themselves.ö
The bank also denies negotiating directly with Indra Aman and says his involvement was to facilitate the transfer of shares and prepare the necessary documentation.
Neither Indra Aman nor Graeme Robertson are likely to present evidence in court, which means the management groupÆs view of the dispute is unlikely to be heard in any depth.
Disclosure of Documents
Within three months of being told about the sale of the pledged shares, Beckett had commenced legal action in the High Court of Singapore. In May 2002, it filed an originating summons against Deutsche for pre-discovery disclosure. Since then, it says the action has been subject to more than 30 interlocutory applications of which seven relate to discovery applications for documents.
Having procured documentation from Deutsche as a result of its various court orders, Beckett says it felt able to file a statement of claim against the German bank in April 2004. In this statement of claim, it alleged that Deutsche had breached its duties as mortgagee for the sale of the pledged shares at gross undervalue.
It then sought further court orders for the release of additional documents and in February 2005 it applied to add PT Dianlia as a second defendant in the case. It says it did so after the procurement of new documents pointed to evidence of a conspiracy.
It firmly refutes any suggestion that it only began to seek the pledged shares back after coal prices soared and the stakeÆs value became apparent. Beckett contends it has been fighting to regain the stake from the moment it knew it had been sold. It says the time lag between the November 2001 Sale and Purchase Agreement and the current Singapore trial is the result of difficulties obtaining the relevant documents to back up its case.
At the time the original operating summons was filed in May 2002, for example, coal prices were still falling (see table two).
Deutsche says it has been reluctant to hand over documents for two reasons. Firstly, it is concerned that employees mentioned in certain documents may be subject to harassment and intimidation in Indonesia. ToppÆs affidavit cites a number of incidents, which resulted in one bank employee refusing to provide an affidavit for fear of his personal safety.
Secondly Deutsche says it believes many of the requested documents were not relevant. Topp refutes BeckettÆs allegations that Deutsche consistently breached its court-ordered discovery obligations. ôI take offence at BeckettÆs scandalous allegationö he says in the affidavit. ôThe negotiations with DSM for the sale of the shares were done orally. It was a deal, which moved fast and we were at the negotiating table over a few meetings. No minutes were kept for these meetings.ö
Deutsche BankÆs head of Asian corporate communications, Mike West, also adds that, ôDeutsche Bank strongly contested the relevance of some documents requested. The court ruled in DeutscheÆs favour in some instances and in BeckettÆs in others. All relevant documents are before the High Court.ö
Beckett of course sees it somewhat differently. In his opening statement, barrister Chong concludes that DeutscheÆs, ôcontumelious failure and/or refusal to provide proper discovery is due to their recognition that the documents, if disclosed, will advance BeckettÆs claims and damage their defense. There can be no other plausible explanation.ö
The LBO
Three years into the court wrangling, Adaro was subject to a $973.5 million quasi LBO (leveraged buy-out) of a kind that had never happened in Indonesia before and is only just beginning to gain traction in the wider Asian region thanks to the increasing activity of private equity and hedge funds.
Prior to this in 2003, the 11% stake held by PT Harapan Insani had been sold to PT Dianlia for an undisclosed sum. The June 2005 acquisition saw Graeme RobertsonÆs New Hope divest its 40.8% stake as well for $378 million.
The LBO was funded via a $600 million senior credit facility, a $353.6 million mezzanine facility and a $50 million equity injection from the Soeryadjaya and Rachmat groups, which owned Dianlia. This allowed the latter two to increase their overall stake from 51% to a beneficial holding of 64%.
A group of international investors acquired the remaining 36%. This latter group comprises: Noonday Asset management (a sub advisor of Farallon Capital Management); GIC Special Investments; Kerry Coal (a member of the Kuok group) and the private equity arms of Goldman Sachs and Citigroup.
The international investors also own the mezzanine facility. This affords them equity conversion rights subject to an event of default under the mezzanine facility, or on scheduled quarterly dates after June 22 2015. The exact percentage of equity that full conversion would entail is not public knowledge.
As a result of the LBO, the disputed pledged shares purchased by Dianlia in 2001 now represent just 4.58% of the total issued and outstanding shares of Adaro. Indeed, Beckett believes the main rationale for the LBO was to dilute the Dianlia stake and make it difficult for Beckett to re-claim it in the event of a successful court case.
In his opening statement Chong states, ôAs if realizing the inevitable outcome of the present proceedings, DSM have undertaken several financial transactions to dilute the value of the pledged shares. They have effectively mortgaged the pledged shares to the hilt in a much publicized LBO.ö
Unsurprisingly, the Beckett shareholders attempted to block the LBO in both Singapore and Indonesia. Injunctions in both countries failed.
Beckett believes the Indonesian injunction failed because the High Court of Singapore would not grant it leave to use documents procured from Deutsche. Chong says the application was, ôsuccessfully opposed by Deutsche Bank on the grounds that the documents might expose them to criminal prosecution in Indonesia.ö
As a result, Beckett says it turned to the Singapore courts to block the sale. In his opening statement Chong says the, ôinjunction was ultimately not granted because the court found that the injunction will not be necessary to protect or preserve BeckettÆs rights to claim back the pledged shares. The Court of Appeal observed, æIn addition notices were also inserted by Beckett in the major Indonesian newspapers warning the public of its interest in the pledged shares. A purchaser of the Adaro shares with notice of BeckettÆs interest to them would not, vis-a-vis Beckett, possess any better title to those shares than DSM and that transaction may be set asideÆ.ö
Consequences
So where does that now leave the LBO and the subsequent high yield bond? The 2010 high yield bond has a change of control put option, which enables bondholders to put the bonds at 101% of their principal amount, plus accrued and unpaid interest.
In the bondÆs offering memorandum it says that Adaro believes the lawsuit stands little chance of success. But it adds that, ôIf there is an adverse decision, in addition to possible required payment of damages substantially all of DianliaÆs Adaro or IBT shares may be needed to be restored in favour of the Claimant in which case the shares may not be available to secure the notes and the note guarantees and this could also result in a change of control.ö
So far the performance of the bond issue has not been affected by the court case. The five-year deal was priced in early December at 99.005% on a coupon of 8.5% to yield 8.75% or 430bp over Treasuries. As of last Friday it was bid at 7.731%.
Clearly a 40% stake does not constitute a change of management control, but were the Plaintiffs able to reclaim their equity interest in full then this would unwind the LBO, which would trigger an event of default for the bond.
Where the LBO is concerned, much depends on a Singapore courtÆs ability to enforce a ruling over Indonesian based assets.
This may result in one or both of two options. Beckett is seeking the full restoration of its 40% stake. But it says that, ôin the event that Deutsche Bank and/or DSM are unable to procure the restoration of equity to their original respective percentages, Beckett will be seeking a claim for damages to be assessed by reference to the present market value of the shares in their original percentages.ö
Based on the NPV of the equity stake at the time of the LBO just under a year ago, this would amount to around $400 million. Similarly, if Deutsche is successful in its claim against Beckett, then the latter would be liable for up to $110 million in unpaid interest and outstanding principal.
Beckett may also choose to follow up a Singapore court case with a new civil action, or criminal case in Indonesia. Deutsche certainly seems to think this is likely. In his affidavit, Topp concludes, ôBased on BeckettÆs conduct, I have reason to strongly believe that Beckett would file an action in Indonesia again the Bank after the conclusion of this proceedings, whatever ruling this Honourable Court may make.ö
Sukanto Tanoto and Hashim Djojohadikusumo have shown considerable determination in trying to wrest back their 40% stake. As such, it is a saga that seems likely to run on and on.
As Charles Dickens once so eloquently put it when describing Jarndyce versus Jarndyce, ôThis scarecrow of a suit has, in the course of time, become so complicated that no man alive knows what it means.ö And perhaps the true meaning of DickensÆ legal case should give all parties in the Adaro case pause for thought. Its moral is this: that Jarndyce versus Jarndyce went on for so many years it practically ruined of all those involved.
A fuller version of this story is scheduled to appear in the March issue of FinanceAsia Magazine.