DEBT RESTRUCTURE: A FINANCIAL TURNAROUND OF PT SIERAD PRODUCE. TBK

It was 1996, when Mr. Budiardjo Tek, the President Director of PT Sierad Produce Tbk (“Sierad Produce / Sierad / The Company”) proudly presented the Company’s achievement, “I am pleased to report that 1996, our first year as a publicly held company, proved to be a highly successful one, with outstanding financial performance recorded across the board. Net revenues for the year amounted to Rp. 454.4 billion (or equal to USD 192.3 million), income from operations totaled Rp. 44.0 billion (or equal to USD 18.6 million), and net income was Rp. 27.1 billion (or equal to USD 11.5 million). With expansion projects now coming on-stream, our poultry feed operation is growing tremendously. Expansion of our feedmill, for example, will result in a tripling of capacity and will allow us to achieve significant economies of scale.”

Not too soon after the situation changed. The Asian monetary crisis beginning in 1997 was sudden and unforeseen. It had been catastrophic for many businesses. All poultry operators – without exception and including the Company – embarked on expansion before the economic crisis in order to take advantage of the excellent prospects of the industry.  These expansions were funded in part by new equity issues in the capital markets and in part, through cheap and readily available financing offered by offshore financial institutions. However, due to the profound and lingering effect of the crisis, the consumer purchasing power deteriorated. Rupiah depreciated from its normal rate of Rp. 2.500,- to Rp. 4,500 at year end 1997, soaring to Rp. 17,000 in January 1998 and levelling off at Rp. 10,000 – Rp. 12,000 with much volatility towards end of 1998. At the same time, the poultry industry’s cost of production went up several folds. “More than 80% of feed’s raw materials were imported and therefore, the industry is heavily import-dependent”, said Albert Sitorus, member of Sierad’s management team. Large poultry operators like the Company found themselves with new production facilities, large foreign currency debts, a Rupiah-based revenue stream and worse, over a 50% decline in consumer poultry consumption during the worst period. It was inevitable that the Company would go into default.  It was only a matter of time. The Company was unable to pay the USD 313 million debt, which actually was only less than 2 times of its annual revenue before the crisis.