PT. DanareksaEntering The Municipal Bond

Market

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Syndicate 3:

Ali Murtado Fauzarrohman

Mahammad Khadafi

Pedro L. Putu Wirya

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Contents• PDAM in Indonesia• Danareksa Overview• Go or No Go with Municipal Bond• Conclusion

PDAM - 65% loans increase IDR 1.66 Trilion (dec 2003) to

IDR 2.75 trillion (dec 2004)

Arrears more than IDR 5 billion, this type of PDAM should be considered for restructuring

MoF stated that more than one third of 440 regional governments had outstanding arrears in excess of IDR 5 billion (primarily because on PDAM loans)

Size Class Number of PDAM

Connections

Total (‘000) % Total

> 50,000 22 2,877 45

25,000 -50,000

30 1,038 16

10,000 -25,000

103 1,612 25

< 10,000 150 812 13

Total 305 6.440 100

PDAM in Indonesia (2004)

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2000 2005 2010 2015

Service Coverage Target

Urban (% total) 34,2 48,6 58,8 69,1

Rural (% total) 6,8 23 38,4 53,9

Capacity Requirement

Connections (million) 4.8 12.9 19 25.4

Production Cap (‘000 L/s) 94 181 268 358

Indonesian water sector, target and capacity requirements

Type of improvement 2004 – 2005 2006 - 2010 2011 - 2015 Total

Optimization 310 - - 310

Expansion 710 1,770 1,830 4,300

Total 1,020 1,770 1,830 4,610

- Of % which urban area 65% 51% 56% 56%

Cost Estimation for Piped Water Supply System (2004-2015)

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Funding source Urban Rural Total % Total

IFI loans 1,470 1,350 2,820 61%

Local government / a 490 340 830 18%

Commercial loans 500 - 500 11%

Central government grants

100 300 400 9%

Revolving funds 40 40 80 2%

Total 2,590 2,030 4,610 100%

Funding Sources For PipedWater Supply System (2004-2015)

PDAM Investment Items Potential New Customers Total Indicative Invesment (IDR)

Kota Bogor System expansion 6,000 46

Kab. Bogor (East)Kab. Bogor (Central)

System expansion (WTP)System expansion

(WTP)

13,000

11,000

78

87

Kota Medan System expansion(WTP)

50,000 58

Kab. Subang Bulk water supplySystem expansion

6,0009,000

3050

Kota Surakarta System expansion, WTP 27,000 79

Kab. Magelang System expansion 4,012 35

Kab. Bandung WTP 26,00 205

Kota Bandung WTP 66,000 150

Kota CirebonKab Cirebon ??

Sytem expansionBulk water supply

28,500NA

158122

Kota Malang Sytem expansion 16,800 46

Kota Balikpapan Various NA 120

Total 263,312 1,265

Investment Requirements for PDAMs

Danareksa Overview• Etasblished in 1978 as an investment bank

– Including the provision of advisory service– Mobilizing capital or corporate costumers through the equity

and debt capital market– Providing wealth management service for high ner worth

individuals– Executing investment in varios currencies on behalf of its

costumers and for own account

• Owned by Indonesia goverment, through the Ministry of Finance

• Total capital in debt and equity has been raised over IDR 60 trilion for public sector and corporate institutions throughout Indonesia (since inception)

Danareksa New Product & Service

• Mutual fund service• US$ denominated fixed income• Syariah based investment offering in the public market.• New identify market : PT. Danareksa be able to enter the

hithero undeveloped market for municipal bond

Danareksa Operating Summary

Danareksa Committees

Danareksa

Audit Risk Management

Nominating & Compensatin

Asset & Liability Investment Human

Resource

• Bond issuers–Corporate bonds–Municipal bonds– Treasury bills– Treasury notes–Agency bonds

The Municipal Bond Market

The Municipal Bond Market

Municipal Bond• Bond issued by municipal company (mostly PDAM is the

major company in municipal area)• Bond issued by regional goverment

– Provinces, regents or municipalities

Pooled Bonds Situation

Pooled Bonds Situation

• Danareksa could use the special purpose vehicle (SPV) to lend the capital to the smaller PDAM– SPV could issue its own bond on the market.

• The contra is the two times witholding tax (20% x 2), Unfortunately, interest payment will be subjected two times 20% witholding tax

The Proposal to Secure the Arrangement of PDAM bond

1. PDAM would need to establish a liquidity reserve amounting to 10% of total outstanding debt to bondholders

2. The owner of PDAM would also need to set up a liquidity guarentee of 10% total outstanding, financed from a cash equity investment in its PDAM

3. If both liquidity reserves will exhaust before bond holders could be compensated in full, the partial guarantee (sponsored by US goverment) would compensate bondholders for 50% losses

The Proposal to Secure the Arrangement of PDAM bond

4. PDAM would pledge its account receivables to compensate the US Goverment in case the trustee would need the partial credit guarantee

Consideration Go or No Go(Underwriter of Municipal bond)

• None of PDAMs were able to afford loans offered by commercial banks• Underwriting a first PDAM bond would be a difficult and time consuming

process• No PDAM has ever issued bound• US Goverment guarantee was willing to issue a partial credit guarantee to

bondholders at very attractive rate about 1% per year on isured amount, for lower than the 5% rate charged by ASKRINDO and other domestic guarantors

• The municipal bond will be the only other option except the loan from the MoF

• Bank Mandiri Sekuritas had started exploring venues to offer bonds to municipalities and PDAMs

CORPORATE RISK

CREDIT RISK

FUNDING RISK

PRODUCTIVITY RISK

SYSTEM RISK

PROCESS RISK

COMPETITOR RISK

FINANCIAL RISK

OPERATIONAL RISK

STRATEGIC RISK

EXTERNALITYRISK

BUSINESS RISK

REPUTATIONAL RISK

REGULATION RISK

Risk Management

Matrix of Probability-Impact Risk

SEVERITY

PROBABILITY

LowUnlikelyModerateHigh

Insignificant

Minor

Major

Catastrophic

Medium

Likely

CREDIT RISK

FUNDING RISKCOMPETITOR RISK

PRODUCTIVITY RISK

SYSTEM RISKBUSINESS RISK

REPUTATIONAL RISKREGULATION RISK

PROCESS RISK

Recommendation

• Ensure the regulation related to the municipal bond issued before entering this business, otherwise seek other government regulation to support this business.

• Do some more detail feasibility study to strategize the next action plan• Ensure the proper resources and business process are ready incase in

paralel with the regulation clearance.• Strict to the regulation and commit to its position as investment bank.

Thank you