New Obligation for Borrowers of Offshore Loans
On October 28, 2014, Bank Indonesia issued Regulation No. 16/20/PBI/2014 on Implementation of the Prudential Principle in the Management of Offshore Loans for Non-Bank Corporations (“Regulation”). This Regulation reflects the Government’s concern about offshore borrowing and its impact on the financial health of borrowers, particularly with respect to currency risk, liquidity risk and overleverage risk.
The Regulation may impact investment structuring by foreign investors, who often combine equity capital and loans when capitalizing their investments.
♦ Prudential Principle
According to the Regulation, non-bank corporations that receive loans in a foreign currency must implement the “prudential principle,” which includes obligations to fulfill a minimum hedging ratio, minimum liquidity ratio and minimum credit rating. Hedging ratio is defined as the ratio of total hedged value and negative margin to foreign exchange assets and foreign exchange liabilities. Liquidity ratio is the ratio of foreign exchange assets to foreign exchange liabilities. Credit rating is a valuation conducted by a rating agency to portray the financial condition or credit worthiness of a company.
The Regulation will enter into force on January 1, 2015, with minimum ratios and phases as follows:
The prudential principle obligations do not apply to foreign exchange loans in the form of trade credits, and the credit rating obligations do not apply to foreign exchange loans used for refinancing and foreign exchange loans from international creditors for the purpose of financing infrastructure projects.
♦ Obligation to Report and Sanctions
Borrowers shall submit a report and supporting documents including audited financial year reports or quarterly financial reports to Bank Indonesia on the implementation of the prudential principle. Failure to report will lead to administrative sanctions in the form of written warning starting from the third quarterly financial report in 2015. Bank Indonesia will circulate the warning letters to interested parties, such as foreign creditors, Ministry of State Owned Enterprises, Ministry of Finance c.q. Directorate General of Tax, Financial Services Authority, and Indonesia Stock Exchange (for listed companies). The credit rating obligation applies to offshore loans signed or issued by January 1, 2016.
November 4, 2014
Please contact Mohamad Kadri (firstname.lastname@example.org) for further information.ARFIDEA KADRI SAHETAPY-ENGEL TISNADISASTRA
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- November 4, 2014