Getting The Deal Through

Loans & Secured

Financing
(https://gettingthedealthrough.com
secured-financing/)
Published: August 2017

Indonesia
(https://gettingthedealthrough.com/jurisdiction/42/indo

 C O M PA R E ( H T T P S : // G E T T I N G T H E D E A LT H R O U G H . C O M / C O M PA R E / 7 9/J U R I S D I C T I O

 D O W N LO A D

Authors

Ibrahim Sjarief Assegaf (https://gettingthedealthrough.com/people/81365/ibrahim-

sjarief-assegaf/), Ahmad Fikri Harahap
(https://gettingthedealthrough.com/people/81366/ahmad-fikri-harahap/), First Deddy
Ariyanto (https://gettingthedealthrough.com/people/81367/first-deddy-ariyanto/) and
Luciana Fransiska Butarbutar
(https://gettingthedealthrough.com/people/81368/luciana-fransiska-butarbutar/)

Assegaf Hamzah and Partners

(https://gettingthedealthrough.com/organisation/2713/assegaf-hamzah-partners/)

 Expand All /  Collapse All

1. What are the primary advantages and disadvantages in your jurisdiction of incurring 
indebtedness in the form of bank loans versus debt securities?

The following table sets out the principal advantages and disadvantages of incurring indebtedness
in the form of bank loans versus debt securities:

Categories Bank loans Debt securities

Pool of Bank loans only involve a limited Debt securities may generate more
investors/creditors number of investors or creditors investors (except for private
placement debt securities which
may only be issued to a specific
number of investors)

Interest rates Interest rates on bank loans are Interest rates on debt securities are
generally higher than in the case generally lower than on bank loans
of debt securities

Assignment of The assignment of rights of The assignment of rights of an

rights or creditor may be performed by way
obligations (as the of assignment agreement (ie, deed
case may be) of cessie). Whereas the
assignment of rights and
obligations of the borrower may
be performed by way of novation
agreement
investor is conducted through the
securities market in the case of a
listed securities or by endorsement
on or presentation of the securities,
hence no specific notarial deed or
long-form agreement required

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2. What are the most common forms of bank loan facilities? Discuss any other types of 
facilities commonly made available to the debtor in addition to, or as part of, the bank
loan facilities.

Term loan facilities are the most common form as most Indonesian borrowers currently require
long-term financings to fund their capital expenditure. Another common form is the revolving credit
facility for financing operational needs. Letters of credit and bank guarantees are also common as
non-fund based facilities.

Swingline loans are not common as borrowers usually refinance their debts by seeking term loans
or to a lesser extent revolving loan facilities. Similarly, competitive bid loans are also not common.

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3. Describe the types of investors that participate in bank loan financings and the overlap 
with the investors that participate in debt securities financings.

Banks often enter into bank loan financings, rather than hedge funds and pension funds. Hedge
funds and pension funds invest in debt securities more than banks do. Overlaps between bank loan
investors and debt securities investors are rare.

See question 2 regarding certain groups of bank loan investors participating in a particular type of
bank loan facility.

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4. How are the terms of a bank loan facility affected by the type of investors participating 
in such facility?
With respect to bilateral bank loan facilities, lenders usually prefer to use their own boilerplate
agreements as a basis for their loans. As regards syndicated bank loan facilities and loan facilities
extended by private equity firms, both the banks and private equity firms usually prefer to use the
standard loan agreements provided by the Loan Market Association (LMA) and Asia Pacific Loan
Market Association (APLMA) as a basis for their loan facilities. While banks and private equity firms
prefer to stick to their boilerplate or the standard LMA or APLMA agreements (as the case may be),
given that the needs and circumstances of each borrower are different, the parties will negotiate as
to how the terms of the proposed bank loan facility can accomodate the interests of the parties to
the transaction. Hence, the terms of one bank loan facility may differ from another, depending on
the negotiations between the parties.

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5. Are bank loan facilities used as ‘bridges’ to permanent debt security financings? How 
do the structure and terms of bridge facilities deviate from those of a typical bank loan
facility?

It is considered common practice for business entities to use bank loan facilities as ‘bridges’ to
permanent debt security financings. Most borrowers would turn to the bank to seek loan facilities.
However, borrowers that are not yet bankable or have yet to meet the requirements set out by the
bank to receive loan facilities would usually instead turn to private equities. This is because the risk
factor, among other things, of such borrowers may be too high based on a bank’s loan assessment
standards but not based on a private equity firm’s standards. Hence, private equity loan facilities are
also a viable option for business entities as far as bridge loan facilities go. Nonetheless, as far as the
type of financing is concerned, business entities are agnostic. They choose whichever form is
cheaper in terms of interests, transaction costs and others. In favourable debt securities market
conditions, a borrower would prefer debt security financing over a bank or private equity loan
facility.

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6. What role do agents or trustees play in administering bank loan facilities with multiple 
investors?

The term ‘trust’ is only recognised in Indonesian government-issued sharia securities and in the
capital market and banking regulations. For bank loan facilities and private placement debt
securities, the role of trustee is undertaken by the security agent.

A security agency can be created by means of a power of attorney whereby the lenders will be
represented by the security agent for, among other things, the execution and registration of the
security agreements, enforcement of the securtiy and the distribution of proceeds therefrom. The
authority of the security agent is limited to actions specified in the power of attorney - typically set
out in the facility or security agency agreement. When the authority is defined broadly, the security
agent may only perform managerial or administrative actions and may not have freedom to act as if
it were the owner of the secured assets. On that basis, the authority of the security agent under the
power of attorney does not preclude the lender, as the real ‘holder’ of the authority, from taking
action on its own account (although this depends on who is the registered secured party on the
security documents). Therefore, the agreement between the security agent and lenders may need
to incorporate a no-action clause or a collective-action clause to ensure that no lender acts
individually at the expense of other lenders.

As the power of attorney does not grant any kind of ownership rights (either legal or beneficial) to
the security agent, there remains a clear line between the assets of the security agent, as the
attorney in fact, and the assets of the lenders, as the principals. In the event of bankruptcy of the
security agent, assets controlled by the security agent (such as monies in the security agent’s
account) resulting from the performance of its duties as the security agent under the security
agreements will not be part of the bankruptcy estate.

Some of the gaps between the Indonesian power of attorney regime and the common law trust
regime can be filled on a contractual basis under an intercreditor agreement and other related
arrangements.

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7. Describe the primary roles and typical fees of the financial institutions that arrange 
and syndicate bank loan facilities.

The roles of an arranger and a facility agent in a syndicated loan facility are similar to those in most
other jurisdictions. The arranger has a leading role in the preparation stage (ie, the determination of
the structure and the negotiation of terms between lenders and the borrower). The facility agent
(usually the same bank as that appointed as arranger) has a managerial role in the performance of
the loan agreement (eg, management of drawdown, payments and repayment, and distribution of
monies among lenders). Another role that is common in a secured syndicated loan is that of
security agent, which is responsible for the management of collateral (including the distribution of
proceeds from an enforcement of security).

Although fees charged by banks for each of the above roles vary, recent transactions suggest that
the fees range between 100 million and 200 million rupiah.

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8. In cross-border transactions or secured transactions involving guarantees or collateral 

from entities organised in multiple jurisdictions, which jurisdiction’s laws govern the
bank loan documentation?

Many loan agreements signed between foreign lenders and Indonesian borrowers are governed by
non-Indonesian law, which are chosen in consideration of significant connection with the
transaction; and accordingly non-Indonesian forums are typically chosen to settle disputes arising
from or in connection with agreements governed under foreign law. However, in cross-border or
secured transactions involving guarantees or collateral from entities organised in multiple
jurisdictions, the security document usually will be governed by the law where the secured objects
are located.

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9. Describe how capital and liquidity requirements impact the structure of bank loan 
facilities, including the availability of related facilities.

Under Indonesian law, in providing facilities to borrowers, all banks must comply with maximum
lending limit (BMPK) requirements. Pursuant to the BMPK, banks are only allowed to extend
facilities in the maximum amount of 10 per cent of their capital to affiliated parties, or a maximum
of 20 per cent of their capital to non-affiliated parties, or a maximum of 25 per cent of their capital
to non-affiliated groups.

Other than the above, in the application for a loan, most banks will evaluate the potential borrower’s
request in order to determine whether or not it would be prudent to extend the loan. A common
evaluation framework includes assessing the potential borrower’s capacity, capital, collateral,
conditions and character (collectively known as the ‘five Cs’).
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10. For public company debtors, are there disclosure requirements applicable to bank loan 
facilities?

Under capital market laws and regulations in Indonesia, a public company is basically required to
disclose to the public in a timely manner all information and transactions which the directors
consider may affect the decision of its shareholders or its stock price on the stock exchange.
Typically a bank loan or debt securities would be discussed. In addition, if the transaction
constitutes a material transaction, more stringent disclosure (or even approval may be required)
depending on the value of the transaction in proportion to the company’s equity. However, a bank
loan obtained by a public company from banking institutions is exempt from compliance with the
material transaction rule.

Bapepam Regulation No. IX.E.2 on Material Transactions and Changes in Principal Business
Activities (Bapepam-LK Regulation No. IX.E.2) defines a material transaction as any transaction or
series of transactions in the form of: (i) investment in business entities, projects or activities; (ii)
purchase, sale, transfer, or exchange of assets or business segments; (iii) lease of assets; (iv)
borrowing of funds; (v) pledging of assets; or (vi) provision of guarantees, where such actions
involve 20 per cent or more of the company’s equity.

Bapepam-LK Regulation No. IX.E.2 contains a provision for public companies planning to issue debt
securities through both domestic and international offerings through private placements where the
amount to be issued exceeds 50 per cent of the public company’s equity but the identities of the
buyers are unknown. In such transactions, the company is obliged to disclose the material
transaction in at least one Indonesian daily newspaper with nationwide circulation and to obtain
approval from the general meeting of shareholders. For this purpose, information on the party
purchasing the debt securities and a summary of the report from the appraiser does not have to be
disclosed; but the maximum total amount that will be borrowed, the interest rate, and the loan
value (if available) must be disclosed.

At the latest two working days after the debt has been issued, the above information must be
announced in at least one Indonesian daily newspaper with nationwide circulation, and the
company is obliged to submit its supporting documents to the Financial Services Authority (OJK).

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11. How is the use of bank loan proceeds by the debtor regulated? What liability could 
investors be exposed to if the debtor uses the proceeds contrary to regulations? Can
investors mitigate their liability?

Under Indonesian law, there are several restrictions imposed on Indonesian banks in providing loans
to the borrower depending on the use of bank loan proceeds:

Banks are not permitted to finance the acquisition of shares by individuals or companies
(other than securities companies) which is speculative in nature. Non-compliance with the
above restriction is subject to administrative sanctions such as discharge of the bank’s
directors or commissioners and prohibition on conducting clearing activities.
Banks are not permitted, either directly or indirectly, to provide financing to real estate
developer companies, or purchase or guarantee securities issued by developer companies, in
which the proceeds of such financing or securities are to be used to procure or utilise land
(‘utilise land’ refers to any activities intended to make land ready for use or for building). Non-
compliance with such restrictions is subject to a fine of 10 per cent of the approved loan
facility.
Banks are prohibited from extending credit facilities and overdrafts to customers for the
purpose of conducting derivatives transactions. Non-compliance with the above restriction is
subject to administrative sanctions such as discharge of the bank’s directors or
commissioners and prohibition on conducting clearing activities.

Further, anti-money laundering rules require banks to perform customer due diligence (CDD) on
both prospective customers and walk-in customers (if necessary) and report any data or findings to
the Financial Transaction Reports and Analysis Centre (PPATK). In the case of prospective
customers, banks are required to perform CDD upon account opening, credit card application or
safe deposit box lease. As part of the CDD, customers must provide documents and information to
the bank to prove their identities (unless they are existing customers of the relevant bank),
including, to the extent necessary, the identity of beneficial owners (if applicable), the source of the
funds used in the transaction, the purpose of the transaction, the financial statements or
description of the operations of the company, the management structure, the ownership structure,
and the particulars of the directors representing the company. The same requirements apply to
walk-in customers conducting one or more banking transactions in one business day amounting to
100 million rupiah or more, while walk-in customers wishing to make a transaction of less than that
amount are only required to provide banks with their identification (for individual customers) or
details of their names and registered addresses (for corporate customers).

Non-compliance with the anti-money laundering rules is subject to administrative sanctions which
range from written warnings to blacklisting of the bank’s directors or commissioners, officers or
shareholders.

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12. Are there regulations that limit an investor’s ability to extend credit to debtors 
organised or operating in particular jurisdictions? What liability are investors exposed
to if they lend to such debtors? Can the investors mitigate their liability?

Banks in Indonesia are prohibited from lending or providing financing in rupiah or foreign currency
to:

foreign citizens;
foreign legal entities or other foreign institutions;
Indonesian citizens with permanent residence status in another country and who are not
domiciled in Indonesia;
foreign branch offices of banks having their head offices in Indonesia; and
foreign branch offices of companies incorporated in Indonesia, except for, among others:
non-cash lending or financing or the extending of guarantees related to investment activities
in Indonesia, subject to the fulfilment of a number of requirements;
lending or financing in syndicate form, subject to the fulfilment of a number of requirements;
credit card lending;
lending or financing for domestic consumption purposes;
intraday rupiah or foreign currency overdrafts as stipulated in Bank Indonesia regulations; and
unpaid administrative costs.

A bank that violates the above regulations is liable to administrative sanctions in the form of written
warnings and a fine of 1 per cent of the transaction value for every infringing transaction, with a
minimum fine of not less than 10 million rupiah and not more than than 1 billion rupiah.

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13. Are there limitations on an investor’s ability to extend credit to a debtor based on the 
debtor’s leverage profile?
 There are no limitations applicable to investors not regulated by Indonesian authorities. As for
banks and other financing companies in Indonesia, the banking and financial services authorities
require them to adopt risk management policies, which must cover, among other things, the
management of credit risks. Limitations based on debtors’ profiles and creditworthiness are
typically incorporated in the risk management policies.

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14. Do regulations limit the rate of interest that can be charged on bank loans? 

Generally, there are no regulations limiting the rate of interest that can be charged on bank loans.
However, Bank Indonesia has issued Circular No. 15/1/DPNP/2013 on Prime Lending Rates (SBDK)
(SEBI No. 15/2013) as the basis for determining the rates of interest to be charged by a bank to its
borrower.

In addition to the above, the limitation of rates of interest is also regulated under an Ordinance
issued by the Netherlands Indies (the colonial predecessor to the Republic of Indonesia). The said
Ordinance (No. 524 of 1938 on Combating Usury) provides that in case a discrepancy in value
between the mutual obligations of the contracting parties has existed from the onset to such an
extent that under the circumstances the disproportions of said obligations are excessive, the judge
may, at the request of the prejudiced party or also by virtue of his authority, moderate the
obligations of the one party or declare the contract null and void unless it is acceptable to all that
consequences of the contract entered into by the prejudiced party had been fully incalculable and
that they had not acted in recklessness, inexperience, or in under pressure The Ordinance was
effectively implemented in the 1950s and the 1960s, when the government adopted a currency
devaluation policy to reduce people’s purchasing power. The determination of the nominal value of
loans at that time was made with a reference to the price of gold before and after the adoption of
the devaluation policy. Nonetheless, the implementation of the Ordinance today remains unclear
and, in fact, no precedent sets out a specific limit of the interest rate. The limitation of interest rate
appears to apply only where a loan agreement does not specify any interest rate, in which case the
court will apply the 6 per cent ‘default interest rate’ as stipulated in the Indonesian Civil Code, or the
average interest rate announced by banks.

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15. What limitations are there on investors funding bank loans in a currency other than the 
local currency?

Under Law No. 7 of 2011 on the National Currency (the Currency Law), all transactions conducted
within the territory of the Republic of Indonesia must be in rupiah. Article 21 of the Currency Law
stipulates that rupiah must be used for the following purposes: (i) payment transactions; (ii) the
settlement of other obligations that must be discharged using money; and (iii) other financial
transactions conducted within the territory of the Republic of Indonesia.

Following the above provisions, Bank Indonesia (BI) recently issued BI Regulation No. 17/3/PBI/2015
on Mandatory Rupiah Use in the Territory of the Republic of Indonesia (PBI No. 17/2015). It
significantly fleshes out the exemptions provided for by article 21 of the Currency Law. The following
types of transactions are specifically exempted under PBI No. 17/2015, including, among others:

international trade transactions (such as export-import of goods and services);

foreign currency bank deposits;
international financing transactions, where the borrower or the lender is located outside
Indonesia; and
foreign currency transactions conducted under the prevailing laws and regulations (eg, a
business conducted in foreign currency by a bank, or transactions on the primary and
secondary markets for government foreign currency denominated securities).

Law No. 7/2011 does not define ‘international financing transactions’; however, the common view
has been that a transaction in which an Indonesian resident borrows money in a foreign currency
from a foreign lender who is not a resident in Indonesia is a transaction that may be described as an
‘international financing transaction’. This view is in line with the newly issued Regulation of Bank
Indonesia No. 17/3/PBI/2015 regarding Mandatory Use of Rupiah in the Republic of Indonesia (BI
Regulation No. 17/2015), which stipulates that an ‘international financing transaction’ occurs only
when one of the parties is domiciled outside Indonesia.

BI Regulation No. 17/2015 added to the above list of exempted transactions any transaction
performed by a bank in Indonesia as part of its banking business, thus a loan transaction in a foreign
currency between an Indonesian bank and its borrower (ie, an Indonesian individual or entity) is
permitted. A foreign currency loan between any other Indonesian lender (which is not a bank) and
an Indonesian borrower nevertheless remains prohibited.

BI Regulation No. 17/2015 also specifically exempted written agreements with respect to strategic
infrastructure project from mandatory use of rupiah, provided that it is approved by BI. The strategic
infrastructure projects cover the following:

transportation infrastructure, which covers airport services, harbour services, railway

infrastructures and facility;
road infrastructure, which covers toll road and toll bridges;
irrigation infrastructure, which covers raw water channel;
drinking water infrastructure which covers undistilled water facility building of raw water,
transmission system, distribution system, drinking water management installation;
sanitation infrastructure, which covers waste water treatment facility, collector system and
main system, and garbage facilities including transporter and landfill;
telecommunication and informatics infrastructure, which covers telecommunication network
and e-government infrastructure;
electricity infrastructure, which covers generator, including development of electricity power
originated from geothermal, transmission and distribution of electricity; and
oil and gas infrastructure, which covers transmission and distribution of oil and gas.

The above is not an exhaustive list. Unlisted infrastructure project may qualify as the strategic
infrastructure project provided that the relevant ministry or authorised institution issues the
required statement letter confirming the proposed infrastructure project is considered as a strategic
infrastructure project.

In addition to the exemptions listed above, based on the press release issued by the Ministry of
Energy and Mineral Resources of the Republic of Indonesia (MEMR) on 1 July 2015 (Press Release)
and BI Letter No. 17/573/DKSP dated 1 July 2015 (BI Letter No. 17/2015), BI and MEMR have
discussed to provide several exemptions to transactions in energy sectors, BI provides three
categories of exemptions and the Press Release provides examples of each category in energy
sectors as follows:

Category 1: transactions that must promptly comply with the mandatory use of rupiah

Some examples in the Press Release for this category include lease agreements on
offices/housings/transportation, Indonesian employees’ salary, other support services. There are
different transition periods provided by Press Release and BI Letter No. 17/2015. Pursuant to the
Press Release, BI provides six months transition for this category (ie, 1 January 2016), while pursuant
to BI Letter 17, BI gives three months transition until 30 September 2015 after which the relevant
transaction must use rupiah.

Category 2: transactions that require further review to be determined whether or not such
transaction may use foreign currency or must use rupiah
 Some examples in the Press Release for this category include fuel, import through local agent, long-
term contract, multi-currency contract. Pursuant to the Press Release and BI Letter No. 17/2015, this
type of transaction is given certain period of time for review by the relevant institutions to
determine under which classification (Category 1 Transactions or Category 3 Transactions) the
transactions should be classified. According to BI Letter No. 17/2015, such review was conducted
until 31 December 2015 and the report was due to be submitted to BI at the latest on 1 January 2016.

Category 3: transactions that may be conducted in a foreign currency

Some examples in the Press Release of this category include expatriate salary, drilling service and
ship charter. Pursuant to BI Letter No. 17/2015, foreign currency may be used in this category in
accordance with regulations issued by the relevant authority. Based on BI Letter No. 28/3/GBU-
DKSP/Srt/B dated 23 February 2016 (BI Letter No. 18/2015), even this category is exempted, BI limits
such exemption to 10 years and only given entities listed in the attachment of MEMR Letter No.
10609/10/MEM.M/2015 dated 30 December 2015 (MEMR Letter).

Please note that these exemptions are not provided for the mandatory use of rupiah regulation and
instead are made pursuant to discretionary authorities of BI and MEMR.

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16. Describe any other regulatory requirements that have an impact on the structuring or 
the availability of bank loan facilities.

The regulations on disclosure requirements for public companies, as detailed in question 10, may
also be applicable to the giving of security or a guarantee by a public company. This may affect the
structuring of the transactions, if lenders wish (as they usually do) to involve the public company as
a security provider.

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17. Which entities in the organisational structure typically provide collateral and 
guarantee support for bank loan financings? Are there limitations on which entities in
the organisational structure are permitted to provide such support?

Generally, there are no restrictions on entities in the organisational structure (eg, parent companies,
holding companies and sister companies) providing collateral and guarantee support for bank loan
financings. However, a bank usually requires that the company in the structure be engaged in the
business activities (ie, be an operating company) and have sufficient revenue to provide collateral
and guarantee support for the bank loan financings.

In addition, there is also the consideration of the corporate benefit that will accrue to the company
providing a guarantee for the debts of another party. Under Indonesian law, there is uncertainty as
to whether a non-listed company’s guarantee, granting of security over its assets, or a stipulation in
an agreement for the benefit of a third party’s creditors in order to secure obligations of the third
party (‘third-party security’), can be regarded to be in the furtherance of the company’s objects and
purposes, and consequently, whether such third-party security may be voidable or unenforceable,
in particular where that company does not derive any comparable commercial benefit from the
transaction for which the third-party security is granted. The validity or enforceability of a third-
party security can be challenged by (i) its receiver in a bankruptcy context; (ii) its liquidator in a
dissolution and liquidation context; or (iii) the company itself, through actions by its shareholders,
board of directors or board of commissioners in other contexts. The obtaining of written
authorisations and the consent of those listed in point (iii) by the company, along with affirmations
that the granting of third-party security is for the benefit of that company, should minimise any
challenge to the validity or enforceability of third-party security on the basis of corporate benefit.

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18. What types of obligations typically share with the bank loan obligations in the 
collateral and guarantee support? If so, are all such obligations equally and ratably
covered by the collateral and guarantee support?

A collateral or guarantee provided to a lender is usually taken as a security for all obligations of the
borrower under all transaction documents between the lender and the borrower, such as the loan
agreement, the security documents and any fee letters. However, hedging obligations are normally
not covered by the collateral or guarantee given by the borrower because the hedging obligations
are outstanding only for a short term and, unlike the loan agreement, such obligations may be owed
by either party (the lender or the borrower).

Where two or more obligations are covered by the same collateral or guarantee, a security sharing
or intercreditor agreement may provide the order of payments for such obligations. By law, the
obligations are equally and ratably protected. However, mortgages and hypothecs recognise
different ranks of obligations, pursuant to which the obligation first registered under the mortgage
or hypothec has a higher rank than another obligation covered by the same collateral but registered
at a later time. In this case, the pro rata principle is not applicable to the obligations of different
ranks.

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19. Which categories of assets are commonly pledged to secure bank loan financings? 
Describe any limitations on the pledge of assets.

Land and buildings or fixtures

Security over land is created by way of a mortgage. Indonesian law adopts the concept of horizontal
separation between the ownership of land and buildings standing thereon (including fixtures). The
parties to the mortgage are free to choose whether or not the right over the building or other
fixtures will also be included into the deed of the mortgage. The consent of the building owner is
required for mortgages over land and buildings if the land and the building standing on it are owned
by two different persons.

Mortgages cannot apply to future land, but can include future buildings and fixtures if so specified
in the mortgage deed.

Due to the concept of horizontal separation, theoretically the building owner alone can create a
fiduciary security over the building only, subject to the land owner’s consent. However, the
application of the concept of horizontal separation in ancillary policies and regulations remains
uncertain to date. Thus, the ownership of buildings and any transfer or security thereof is not clearly
regulated. Although Indonesian courts should recognise the fiduciary security over a building, its
enforcement may remain questionable.

Shares and other securities

Security over shares and other securities may be created by way of a pledge or fiduciary security,
but the use of a pledge is more common. A pledge prohibits the security provider from maintaining
and controlling the secured object, while a fiduciary security allows the security provider to utilise
the secured assets in its operations, including disposal in its ordinary course of business, so long as
no default occurs. As far as shares and other securities are concerned, it is difficult to identify any
real need to allow the security provider to maintain control over them, hence a pledge is more
common for these types of securities.
 A pledge cannot cover future bearer securities. While it is common to include future securities in
the initial pledge (particularly over shares acquired by the security provider based on a right of first
refusal or pre-emptive right), the initial pledge arguably only creates contractual obligations of the
security provider (including the obligation to pledge the shares or other securities once they exist),
so that the security right can only arise after being perfected (as explained below) once the
securities come into existence. When the future securities come into existence, while not
specifically required to do so, lenders typically require an abridged pledge agreement in relation to
such securities followed by further perfection action.

Cash deposits in bank accounts

Security over operating bank accounts was previously established by way of fiduciary security.
However, the fiduciary registration office later deemed that contractual rights cannot be subject to
fiduciary security and have since refused to register fiduciary security over bank accounts.
Consequently, all types of bank accounts are now secured by way of pledge. The pledge is created
by the lender, while the account holder executing the pledge agreement perfects it by delivering a
notice (typically with some additional instructions) to the bank, which then acknowledges the
notice. The pledge agreement may specify whether or not the account holder may continue
operating the account so long as default does not occur.

Contractual rights (including receivables and rights under insurance policies)

Security over contractual rights is created by way of fiduciary security, a conditional assignment or
pledge, depending on the nature of the contractual rights. Receivables and insurance claim
proceeds are usually secured by way of fiduciary security. Although a fiduciary security over an
asset automatically includes insurance claim proceeds, if the asset is insured, typically a separate
fiduciary security over the insurance claim proceeds is executed.

A fiduciary security over future receivables and insurance claim proceeds is possible if so specified.
Once the secured objects exist, they are deemed to be subject to the fiduciary security and it is not
necessary for the parties to execute any further documents or obtain any further perfection. The
security provider in a fiduciary security must be domiciled in Indonesia. If not, alternative security
types are pledge or conditional assignment, whereby upon default the receivables or insurance
proceeds are transferred to the lender by notice to the counterparty.

Other contractual rights used to be secured by fiduciary security. However, the fiduciary security
registration office now refuses to register them. As an alternative, the parties usually opt for a
conditional novation entered into by the lender and security provider with the consent of the
counterparty in the underlying contract. Upon default, the lender or its designee will, by way of
notice, replace the security provider as party to the contract and assume all of the rights and
liabilities of the security provider under the contract. However, a conditional novation is not a
statutorily recognised security right. Hence, it creates a mere contractual right. As a consequence,
the lender is exposed to the risk of default by, and insolvency of, the security provider, so that the
lender’s recourse is limited to a civil claim. In the event of the insolvency of the security provider,
the lender will be classified as an unsecured creditor.

Tangible assets such as ships, aircraft, machinery, etc

Security over tangible assets is created by way of pledge (except for immoveable assets) or
fiduciary security. However, registered vessels (ie, those with a gross volume of more than 20 cubic
metres, or rights of usufruct on the vessels or shares in the vessels) are secured by way of
hypothec. Deeds of hypothec are issued by the Registrar of Shipping.

It is common for the security provider in a hypothec to grant an irrevocable power of attorney to the
lender to enforce the hypothec for and on behalf of the vessel owner upon default without the
involvement of the security provider. The power of attorney can also incorporate additional clauses
such as covenants (i) to authorise a private sale of the vessel upon default, (ii) to seek the lender’s
approval before the security provider leases the vessel, (iii) to transfer any insurance proceeds to
the lender as part of repayment if any insured risk occurs, and (iv) not to change the form of the
vessel without the lender’s consent.

A hypothec cannot be created over future assets. However, the borrower may grant a hypothec not
only over an existing vessel, but also over a vessel that is still being built, if it is registered. The
security right can only be created after the registration date, at which time the hypothec agreement
can be executed and the perfection requirements satisfied.

While aircraft may be secured, Indonesian law does not specify the form of such security and no
registration procedure is currently in place to create security rights over the aircraft frame and
engines. In practice, lenders rely on non-Indonesian law security documents and register the same
along with the irrevocable de-registration and export request authorisation (IDERA) with the
aircraft registration authorities. This gives the lender an irrevocable authorisation to procure the de-
registration, export and physical transfer of the aircraft and other basic remedies pursuant to the
Cape Town Convention.

Stock

Security over stock (inventory) is usually created by way of fiduciary security in order to enable the
security provider to keep utilising the stock in the normal course of its business. The security
provider is also permitted to sell (transfer) the stock, provided that the sale is carried out based on
the common procedures and practices applicable to its business, that the security provider makes
available substitute goods afterwards, and that the borrower and the security provider are not in
default.

A fiduciary security over future stock is possible, in the sense that the perfection procedure can be
completed before the stock is available. Upon the coming into existence of the stock, the parties are
not required to execute any additional security documents or repeat the perfection procedure.

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20. Describe the method of creating or attaching a security interest on the main categories 
of assets.

Pledges over tangible moveables and bearer securities are perfected by way of delivery of the
secured assets without registration. A pledge over registered securities is created by execution of
the pledge agreement by the lender and the security provider (in the form of a notarial deed or a
privately executed agreement) and perfected by notice to the company issuing the securities.
Typically, the company or issuer must register the pledge in the company’s register of members. All
of these formalities must be carried out. Failure to do so will result in the invalidity and
unenforceability of the security.

Similar to a pledge, a conditional novation or assignment does not require registration. However, a
conditional novation or assignment does not give the lender a security right recognised under
Indonesian law. Instead, it gives the lender a mere contractual right.

Land

A mortgage is created by the execution of a mortgage deed by the landowner (as the security
provider) and the lender before an authorised land conveyancer. In practice, it is common for the
land owner to be required to facilitate the lender to complete this phase by granting an irrevocable
power of attorney that is valid for one month so the lender can execute the mortgage deed for and
on behalf of the land owner at any time the lender desires without the involvement of the land
owner. The power of attorney must be made in the form of a deed issued by the authorised land
conveyancer. If the secured land is not registered in the name of the security provider, the mortgage
deed cannot be entered into and instead a power of attorney is granted in favour of the lender, valid
for three months, to enable the lender to independently enter into the mortgage deed once the land
has been registered in the name of the security provider.
 A mortgage is perfected by registering it with the relevant land office, which will then issue a
certificate of mortgage as evidence. A mortgage is perfected on the date of the certificate of
mortgage (on a ‘first come, firstserved’ basis), which should be the seventh day after all of the
documents necessary for the registration are submitted to the land office (or, if that day falls on a
holiday, the next business day).

Shares and other securities

A pledge over tangible moveables (such as bearer securities) is created (and perfected) by placing
the secured objects under the control of the lender or an agreed third party. As for a pledge over
registered securities, it is perfected by notifying the pledge to the securities’ issuer. Registration of
the pledge may be required depending on the type of securities: a pledge over registered shares
must be registered in the company’s register of members or, for a listed company, the securities
administration bureau. To prevent listed securities from being traded during the pledge, trade
blocking should be put in place with the Indonesian Central Securities Depository (KSEI) to block
the securities account (or its balance) in which the shares are deposited. If the company issues
certificates as evidence of the ownership over shares, it is also customary for the pledgor to deliver
the certificates to the lender. Meanwhile, a fiduciary security is created by executing a fiduciary
security deed before a notary, and the security is perfected by registration with the fiduciary
security registration office.

Cash deposits in a bank account

A pledge over an account is perfected by delivering a notification of the pledge to the account’s
bank, as the party against whom the rights attached to the pledged objects will be enforced. Not all
banks are familiar with the concept of a pledge over account. Hence, lenders typically require the
pledged account to be opened and maintained with the lender or the security agent.

Contractual rights (including receivables and rights under insurance policies)

A fiduciary security over contractual rights must be registered with the authorised fiduciary security
registration office and is perfected on the registration day. However, the fiduciary security is not
binding against the counterparty (obligor or insurer) until and unless it is duly notified (either by the
court bailiff or by ordinary notice acknowledged and agreed by the counterparty). Meanwhile, the
conditional novation of contractual rights is created upon the execution of the agreement (including
by the counterparty to the contractual right) and made effective by delivery of notice to the
counterparty upon occurrence of default. No registration is required.

Intellectual property

A fiduciary security over intellectual property is perfected upon registration with the fiduciary
security registration office. It is recommended that the intellectual property office be notified about
the fiduciary security to facilitate the transfer of the intellectual property upon enforcement of the
fiduciary security.

Tangible assets such as ships, aircraft, machinery, etc

As a general rule, the pledge is perfected by placing the secured object in the possession of the
lender or an agreed third party. The security right will cease to exist if the lender loses its
possession of the tangible asset for any reason other than an act of theft. A hypothec over a vessel
is perfected by registration with the Registrar of Shipping, while a fiduciary security is perfected by
registration with the fiduciary security registration office. Perfection of security over an aircraft
depends on the security right created.

Stock

A fiduciary security over stock is perfected by electronic registration with the fiduciary security
registration office.

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21. What steps are necessary to perfect a security interest on the main categories of assets? 
What are the consequences of failing to perfect a security interest?

With regard to the steps necessary to perfect a security interest (or other lien) on the main
categories of assets, see question 20.

Inside bankruptcy

A perfected security in rem (eg, pledge, fiduciary security, hypothec and mortgage) should not be
affected by bankruptcy proceedings. Lenders can enforce the secured objects independently as if no
bankruptcy proceedings are under way, provided, however, such enforcement rights are stayed for a
maximum period of 90 days as of the declaration of bankruptcy. Lenders that are secured by cash
collateral or entitled to a set-off right can enforce their rights without being subject to such period.

Lenders’ independent rights of enforcement will cease if they fail to enforce their security within
two months as of the date on which the security provider is deemed insolvent, at which point the
secured assets will be liquidated by the receiver. Insolvency occurs when claims have been verified
but the debtor does not propose any composition plan, a proposed composition plan is rejected, or
the court denied the ratification of a composition, at which point the receiver will liquidate the
estate in bankruptcy. While their priority rights remain in place, the lenders must pay the
bankruptcy costs on a pro rata basis.

Security rights in general are enforced by way of a public auction of the secured objects, although
some may be enforced through a private sale under specific conditions. The lender then applies the
proceeds of the sale against and up to the outstanding amount; any excess must be refunded. Any
balance will be paid from the enforcement of other assets of the borrower as unsecured claims (via
ordinary civil claims).

Claims under a guarantee are considered as unsecured claims which rank in pari passu with other
unsecured claims, such that they will be verified and paid pro rata from insolvency liquidation
proceeds.

Outside bankruptcy

Other than the stay period, there is no difference between the general procedures for enforcing
security in rem during insolvency and outside bankruptcy.

As regards a guarantee, if the guarantor refuses to pay, the guarantee may be enforced by selling
the guarantor’s assets at a public auction upon a final and conclusive court judgment, which may
take up to three to five years to secure. If there are other unsecured creditors whose claims are also
due and payable at the same time and the guarantor’s assets are not sufficient to pay all of them, a
pro rata distribution is applied.

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22. Can security interests extend to future-acquired assets? Can security interests secure 
future-incurred obligations?

Yes, several types of security interests (and other liens) may be extended to future acquired assets -
see question 19.

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23. Describe any maintenance requirements to avoid the automatic termination or 
expiration of security interests.

Security documents are accessory to the underlying loan agreements; thus, the full repayment and
discharge of the loan and other outstanding amounts or liabilities will automatically result in the
release of the security rights. The termination of the security may also occur when the secured
objects cease to exist. For example, the termination of an insurance policy will affect the fiduciary
security over proceeds from such insurance policy; and a technical failure in the borrower’s
machineries will harm the lender’s interest in the fiduciary security over such machineries. In said
examples, re-execution of security documents may be required.

The maintanance requirements needed to avoid such automatic termination may be different,
contingent on the types of assets being secured, as described below.

Land and buildings or fixtures

As land and buildings or fixtures are typically secured by way of a mortgage - see question 19 - the
security interest will automatically be terminated in the event the right over the secured land and
buildings or fixtures (ie, ownership right or right to build or right to use) ceases to exist. In order to
maintain the existence of rights over secured land and buildings or fixtures, current provisions
oblige the security provider (i) not to sell, assign, dispose, pledge, transfer or otherwise encumber
any secured land and buildings/fixtures; and (ii) to deliver the original certificates of the secured
land to the lender or security agent (as applicable). These are elements that are typically included
in the security document.

Shares

As shares are typically secured by way of pledge - see question 19 - the security interest will
automatically be terminated in the event that the secured shares cease to exist. In order to maintain
the existence of secured shares, current provisions oblige the security provider (i) not to sell,
assign, dispose, pledge, transfer or otherwise encumber any of the secured shares; (ii) to refrain
from conducting any act that leads or may lead to a reduction in the value of the secured shares or
may alter the rights attached to the secured shares; and (iii) to deliver the original certificates of the
secured shares to the lender or security agent (as applicable). These are elements that are typically
included in a relevant security document. Apart from maintaining the existence of secured shares,
these provisions also serve to maintain the value of the secured shares.

Cash deposits in bank accounts

As cash deposits in bank accounts are typically secured by way of pledge - see question 19 - the
security interest will automatically be terminated in the event that such secured bank accounts
cease to exist. In order to maintain the existence of secured bank accounts, current provisions
oblige the security provider (i) not to sell, assign, dispose, pledge, transfer or otherwise encumber
any of its rights or title to, or interest in, the secured bank accounts; (ii) not to extend the time for
payment of or settle or compromise the amount of the secured bank accounts; and (iii) not to take
any action or fail to take any action that will result in the impairment of any credit balance under the
secured bank accounts. These are elements that are typically included in a relevant security
document. Apart from maintaining the existence of the secured bank accounts, said provisions also
serve to maintain the value of secured bank accounts.

Receivables

As receivables are typically secured by way of fiducia security - see question 19 - the security
interest will automatically be terminated in the event such secured receivables cease to exist. In
order to maintain the existence of secured receivables, current provisions oblige the security
provider (i) not to sell, assign, dispose, pledge, transfer or otherwise encumber any of its rights or
title to, or interest in, the secured receivables; and (ii) not to extend the time for payment of or
settle or compromise the amount of the secured receivables. These are elements that are typically
included in a relevant security document. Apart from maintaining the existence of secured
receivables, said provisions also serve to maintain the value of secured receivables.

Rights under insurance policies

As rights under insurance policies are typically secured by way of fiducia security - see question 19 -
the security interest will automatically be terminated in the event such secured insurance policies
cease to exist. In order to maintain the existence of secured insurance policies, current provisions
oblige the security provider to: (i) fulfil all requirements set out by secured insurance policies or the
insurance companies, such as paying the insurance policies premium; (ii) not sell, assign, dispose,
pledge, transfer or otherwise encumber any of its rights or title to, or interest in, the secured
insurance policies; and (iii) not extend the time for payment of or settle or compromise the amount
of the secured insurance policies. These are elements that are typically included in a relevant
security document. Apart from maintaining the existence of secured insurance policies, said
provisions also serve to maintain the value of secured insurance policies.

Tangible assets such as ships, machinery, etc

As tangible assets are typically secured by way of fiducia security - see question 19 - the security
interest will automatically be terminated in the event such secured tangible assets cease to exist. In
order to maintain the existence of secured tangible assets, current provisions oblige the security
provider: (i) not to sell, assign, dispose, pledge, transfer or otherwise encumber any of its rights or
title to, or interest in, the secured tangible assets; (ii) to maintain the secured tangible assets in
good and marketable condition, fair wear and tear excepted, and shall forthwith replace or repair
defective or damaged secured tangible assets, including all documents relating to the ownership
thereto; and (iii) to store and maintain the secured tangible assets in a location, building, storage or
any other places owned or controlled by the grantor. These are elements that are typically included
in a relevant security document. Apart from maintaining the existence of secured tangible assets,
said provisions also serve to maintain the value of secured tangible assets.

Stocks

As stocks are typically secured by way of fiducia security - see question 19 - the security interest
will automatically be terminated in the event such secured stocks cease to exist. In order to
maintain the existence of secured stocks, current provisions oblige the security provider to (i)
maintain the secured stocks in good and marketable condition, fair wear and tear excepted, and
shall forthwith replace or repair defective or damaged secured stocks, including all documents
relating to the ownership thereto; and (ii) make available the substitute of secured stocks should
the grantor sell or transfer the secured stocks. These are elements that are typically included in a
relevant fiducia security document. Apart from maintaining the existence of secured stocks, said
provisions also serve to maintain the value of secured stocks.

Further typically set out in a relevant security document is the obligation of a security provider to
promptly pay and provide for the payment and discharge of all taxes, assessments, levies or other
governmental charges that may be levied, assessed or imposed on, or any right to adverse claim to
be hereafter created upon, the secured objects or any part thereof, when due and payable.

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24. Are security interests on an asset automatically released following its sale by the 
debtor? If so, are the releases mandated by law or contract?

It is a legal principle that in rem security interests (ie, those arising from mortgages, pledges,
hypothecs and fiduciary security) ‘follow’ the assets wherever the assets are. The security interests
will remain enforceable by the lender regardless of any sale or assignment of the secured objects.
Following the sale, the purchaser of the secured objects will be, for all intents and purposes,
considered as the new security provider.
 Mortgages, hypothecs and fiduciary security are recorded in public registers. It is very difficult for
the purchaser to justify his purchase on the ground of, for instance, good faith because of his failure
to check the status of the secured objects from the public registers or ownership certificates (if
any). Moreover, specifically for mortgages, the land office will only register the purchaser as the
new owner of the land if the lender having a security interest over the land gives its written consent
for the land transfer.

A pledge, on the other hand, is not registered in a public register but it is only registered in the
shareholder register maintained by the company’s directors, if the secured objects are shares. For a
pledge of tangible objects, it is a requirement that the objects are not under the possession or
control of the borrower during the pledge period. This requirement makes it impossible for the
borrower to effectively deliver the objects to the purchaser. Even if such delivery could occur
without the lender’s knowledge and consent, the lender’s security interest will remain enforceable
and the law gives the lender a right to repossess the objects as pledgee. Technicalities occur when
the purchaser can prove its good faith on the ground that it has relied on the seller’s representation
and there is no reliable register that it could rely on to check the status of the objects (even the
shareholder register may be manipulated by the company). There is no real precedent as to whether
the share pledge or the good-faith purchaser should prevail, hence the lender is exposed to some
risks.

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25. What defences does a guarantor have against claims for non-fulfilment of guarantee 
obligations? Can such defences be waived?

The Indonesian Civil Code gives the guarantor the following rights:

the right to set off its guarantee obligations against the lender’s obligations to the guarantor;
the right to demand the lender to enforce its claim against the borrower’s assets before the
lender enforces the guarantee;
the right to require the lender to split its claims among guarantors, if there is more than one
guarantor; and
the right to demand the borrower to indemnify the guarantor against and release it from the
guarantee obligations.

All of the above rights can be waived, and it is common to provide such waivers under guarantees.

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26. Describe any parallel debt or similar requirements applicable in a secured bank loan 
financing where an agent acts for multiple investors.

In order for the rights of the multiple investors to be recognised and enforceable against the
borrower, the loan documents must clearly specify the capacity of the agent as such agent acting
for and on behalf of the investors. The documents should also provide the borrower’s
acknowledgement of its obligations owing to existing and future lenders. Any third party may at any
time participate in the loan as a new lender by signing a receivable assignment agreement in a form
that may be pre-agreed. To ensure the enforceability of the new lender’s rights against the borrower,
the loan agreement should stipulate that the borrower will acknowledge any such assignment to
such new lender, as may be notified by the agent from time to time.

A parallel debt clause, as is often found in common law-governed loan agreements, is not
commonly used in Indonesian law-governed loan agreements as the provision could be interpreted
as having the effect of double-counted debt.

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27. What are the most common methods of enforcing security interests? What are the 
limitations on enforcement?

A security right may be enforced upon the non-payment of the secured obligations when they
become due and payable or upon other types of default as specified in the finance documents.
Although it is not statutorily or contractually required for a loan to come attached with a specified
maturity date, lenders are expected to deliver demand letters to borrowers, with copies to the
security providers, following a default or acceleration notice. It is critical for creditors to commence
enforcement based on a clear and unequivocal basis that a default has indeed occurred.
Consequently, although not required, following an event of default, it is customary (and therefore it
is advisable) for creditors to: (i) issue warning letters that an event of default has occurred and
demand the borrower or obligor to satisfy the due obligations within a specific deadline; (ii) if the
demand is unsatisfied, deliver a default notice setting out the above; and (iii) a final demand letter
emphasising that the creditors will commence enforcement actions.

Enforcement of security rights in rem is distinct from that for contractual security interest (security
in personam).

Enforcement of security in rem

In relation to security rights in rem, such as mortgages, pledges and fiducia carry parate executie
rights, which means that the lender or security agent (as applicable) may directly enforce those
rights as if they were final and binding court decisions. Therefore, a separate court order is not
required for enforcement and lender or security agent (as applicable) may directly apply for
auction. Even though not required by law or practice, in some instances lenders may choose to
apply for a court order prior to commencing enforcement as the process may compel the borrower
or security provider to pay or offer lenders additional negotiation space.

Enforcement of security in personam

On the other hand, security in personam or contractual security interest must be enforced through
ordinary civil claim proceedings. Personal or corporate guarantee is normally drafted so that on
borrower or obligor default, the guaranteed party may issue a demand letter on which the guarantor
must pay immediately or within the agreed time period. If the guarantor fails to pay, the lenders or
security agents (as applicable) may commence ordinary civil claim proceedings. With respect to
other security in personam such as conditional novation or assignment for security purposes,
secured lenders or security agents (as applicable) can attempt to enforce their rights as stipulated
in the document; however, if the security provider or counterparty contests, lenders or security
agents (as applicable) would need to file an ordinary civil claim, which may take one or two years,
or even more.

For limits on enforcement in relation to bankruptcy, see question 21.

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28. Describe the impact of fraudulent conveyance, financial assistance, thin capitalisation, 
corporate benefit and similar doctrines on the structure of bank loan financings.

Fraudulent conveyance or actio pauliana may result in the nullification of a transaction between the
borrower and the lender if (i) such transaction was not required by law or was not on bona fide
terms; (ii) the transaction prejudiced the interests of other creditors; and (iii) the borrower and the
lender knew or should have known that such action would prejudice the other creditors. In the
context of bankruptcy of the borrower, such knowledge of the borrower and the lender would be
presumed if the transaction was performed within one year prior to the bankruptcy declaration, and
such transaction: (i) constitutes an agreement under which the borrower’s obligations were more
 onerous than the lender’s obligations; (ii) constitutes the payment of or granting of security for
debts which were not due and payable; or (iii) was performed with an affiliated party. Furthermore,
the payment of due and payable debt by the borrower to the lender may even be nullified if the
lender is clearly aware that a petition for a bankruptcy declaration has been filed against the
borrower or the transaction is intended to give the lender payment ahead of other creditors.

Considering the foregoing, the transaction between the borrower and the lender must be structured
on an arm’s-length basis. A few lenders may also consider performing searches on the filing of
bankruptcy proceedings against the borrower or the appointment of a receiver, administrator or
liquidator, although the effectiveness of this method remains questionable as Indonesia does not
have reliable records that can be accessed by the public for this purpose.

The absence of corporate benefit may also be a ground for challenging the validity or enforceability
of a transaction. This is particularly true in the context of a third-party security (ie, a guarantee or
collateral given by a company to the lender as security for the repayment of another party’s
indebtedness). The challenge to the transaction may be made by (i) a receiver in a bankruptcy
context; (ii) a liquidator in a dissolution and liquidation context; or (iii) the company itself, through
actions by its shareholders, board of directors or board of commissioners, in other contexts. To
minimise this risk, the lender typically requires the company to obtain the written authorisations
and consents of its shareholders, board of directors and board of commissioners.

The concepts of financial assistance and thin capitalisation are not specifically provided for under
Indonesian laws.

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29. What types of payment or lien subordination arrangements, or both, are common 
where the debtor has obligations owing to more than one class of creditors?

Subordination usually involves a number of creditors divided into different classes, with each having
a security interest in the same collateral, one or more of whom have lien priority over the others.
The first class creditor will be repaid first from the collateral proceeds, and the other classes of
creditor collect only from any remaining collateral value, or in other words, the subordinating
creditor agrees to lower the priority of its lien in relation to that of other secured creditors and, thus,
delays its recourse to the collateral until the other creditors’ secured claims have been satisfied.

In payment subordination, the subordinated creditor will subordinate its right to payment and
collection to the payment of another claimant. In this arrangement, the subordinated creditor is
prohibited from receiving payment until the senior creditor is paid in full. Similarly, the borrower is
bound to pay the senior creditor before the subordinated creditor. If the subordinated creditor
receives any payment, it must receive it as an agent of the senior creditor and transfer the paid
amount to the senior creditor.

With respect to bankruptcy statutes, under Law No. 37 of 2004 on Bankruptcy, secured creditors
may immediately execute the collateral and receive payment of their loans prior to other creditors.
Secured creditors can also enforce their security interests without being restricted by bankruptcy
proceedings. On the other hand, unsecured creditors and subordinated creditors cannot
immediately execute the collateral and receive payment of their loans and are still subject to
bankruptcy proceedings.

Secured creditors or secured claims are not included in the above claims as they are not subject to
bankruptcy proceedings and may be enforced independently and separately.

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30. What creditor groups are typically included as parties to the intercreditor agreement? 
Are all creditor groups treated the same under the intercreditor agreement?

The intercreditor agreement is typically entered into between lenders of different classes.

Where there is only one group of lenders in a syndicated loan agreement (eg, unsecured lenders),
all creditors are treated equally in terms of any payment distribution, voting rights, etc, or as
prescribed in the syndication agreement. If there is more than one group of lenders (eg, unsecured
and subordinated lenders), the intercreditor agreement would provide rankings for the different
groups of lenders, the order for the distribution of enforcement proceeds, etc. Voting rights for each
group of lender may also be distinguished pursuant to their respective groupings.

Notwithstanding the above, the rights and priority accorded to a particular lender on the basis of an
intercreditor agreement are contractual in nature. The enforcement of such rights and priority will
thus depend on the due performance of the intercreditor agreement by the other lenders. For
example, upon the default of a subordinated lender under an intercreditor agreement between the
subordinated and senior lender, the senior lender will not be able to enjoy priority against the
subordinated lender, while the law treats both lenders equally. However, the senior lender may seek
compensation for the default. In a bankruptcy case, there is no certainty about whether the court
would honour any arrangement in the intercreditor agreement.

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31. Are junior creditors typically stayed from enforcing remedies until senior creditors 
have been repaid? What enforcement rights do junior creditors have prior to the
repayment of senior debt?

Junior (subordinated) creditors do not usually receive any payment from the borrower until the
senior (unsecured) creditors are repaid. However, this arrangement arises from the agreement
between the junior and senior creditors while under Indonesian law, the junior and senior creditors
are equally entitled to the rights of unsecured creditors in general.

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32. What rights do junior creditors have during a bankruptcy or insolvency proceeding 
involving the debtor?

In the context of bankruptcy, the discretionary power of the receiver and commercial court plays a
significant role. The rights of the junior creditors heavily depend on whether or not the reveiver or
court honours the agreement between the junior and senior creditors under which the rights of
each creditor group are provided. If the receiver or court chooses to set aside the agreement, during
the bankruptcy proceeding the junior creditors will have the same rights as those of the senior
creditors.

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33. How do the terms of the intercreditor arrangement change if creditor groups will be 
secured on a pari passu basis?

Generally, all unsecured creditors are treated on a pari passu basis. Any different arrangement must
be reflected in the relevant provisions on, for instance, the order for the distribution of enforcement
proceeds under the intercreditor arrangement, although there is no certainty about whether such an
arrangement would be honoured by the court, particularly in a bankruptcy context.

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34. What forms or standardised terms are commonly used to prepare the bank loan 
documentation?

The standard documents of the LMA and APLMA are often used in loan transactions in Indonesia.
However, Indonesian banks entering into bilateral loans usually offer their own drafts to the
borrower and such drafts may be quite different from one another.

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35. What are the customary pricing or interest rate structures for bank loans? Do the 
pricing or interest rate structures change if the bank loan is denominated in a currency
other than the domestic currency?

There are no customary pricings or interest rate structures. Banks will determine the pricings on the
basis of the borrower’s profile and the criteria set out in their internal policies (which are not
publicly disclosed). In fact, the criteria used by one bank may be quite different from those used by
another bank.

In general, the pricing or interest rate is usually subject to, among other things, the borrower’s
rating, the existing relationship between the bank and the borrower, the profile of the borrower’s
group and its business, the type and currency of the facility and the availability of collateral or a
guarantee. Other factors such as the number of available lenders and the size of the bank relative to
the size of borrower may also be taken into consideration.

Bonds usually bear lower interest rates than loans. Most recent bond issuances and loans apply
floating rates in reference to LIBOR, for loans given by foreign banks, or Jakarta Interbank Offered
Rate (JIBOR), for loans given by domestic banks.

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36. What other bank loan yield determinants are commonly used? 

There is no single answer to this question. As explained in question 35, the yield determinants may
vary from one bank to another. Some banks may establish pricing floors for pricing determination,
but others may not.

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37. Describe any yield protection provisions typically included in the bank loan 
documentation.

Increased cost provisions

A borrower shall pay the lender the amount of any increased costs incurred by the lender as a result
of the introduction of or any change in (including in the interpretation, administration or
application) any law or regulation, or compliance with any law or regulation, made after the date of
the bank loan agreement. However, borrowers in a stronger bargaining position have often been
successful in negotiating a reduced scope of the increased-cost provisions by, for example,
excluding any additional tax payable by the borrower as a result of the transfer of receivables by the
bank to a non-bank or a foreign lender.

Increased cost means: (i) a reduction in the rate of return from the facility or on a lender’s (or its
affiliate’s) overall capital; (ii) an additional or increased cost; or (iii) a reduction of any amount due
and payable under any finance document, which is incurred or suffered by a lender or any of its
affiliates to the extent that it is attributable to that lender having entered into its commitment or
funding or performing its obligations under the bank loan document.

Prepayment premiums

Usually, any prepayment is made together with the accrued interest on the amount prepaid and
subject to any break costs without premium or penalty, although this requirement is very negotiable
for financially stronger borrowers. Break cost means the amount (if any) by which the interest that a
lender should have received for the period from the date of receipt of all or any part of its
participation in a loan or unpaid sum to the last day of the current interest period in respect of that
loan or unpaid sum, had the principal amount or unpaid sum received been paid on the last day of
that interest period, exceeds the amount that that lender would be able to obtain by placing an
amount equal to the principal amount or unpaid sum received by it on deposit with a leading bank
in the relevant interbank market for a period starting on the business day following receipt or
recovery and ending on the last day of the current interest period.

Withholding tax gross-up provisions

A grossing-up clause protects lenders against receiving less money due to withholding taxes. Under
Indonesian income tax law, interest including premiums, discounts and recompenses in connection
with a loan repayment guarantee which are paid or provided to be paid or the payment of which is
owed by an Indonesian taxpayer to a non-resident taxpayer, or an Indonesian resident other than
banks, is subject to withholding tax of 20 per cent of the gross amount.

Under Indonesian tax law, there is no difference in withholding tax treatment, and the tax is not
dependent on the type of payment concerned (eg, interest, profits on foreign exchange trading, fees
for products or professional fees). They are all subject to withholding tax at a rate of 20 per cent of
the gross amount. However, a double taxation treaty may provide protection from withholding tax in
the form of tax relief or a reduced rate.

Under Indonesian tax law, tax grossing-up clauses are common. However, grossing up is not
efficient for the borrower as the gross-up amount would not be a deductible expense for the
borrower’s taxation purpose.

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38. Do bank loan agreements typically allow additional debt that is secured on a pari passu 
basis with the senior secured bank loans?

Loan agreements do not typically provide the borrower with the right to increase the lender’s
commitment. Any additional debt beyond the lender’s commitment may be stipulated in an
amendment to the loan agreement, which requires the consent of all parties and, for the lender,
approval from its credit committee.

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39. What types of financial maintenance covenants are commonly included in bank loan 
documentation, and how are such covenants calculated?

A loan agreement usually includes covenants for the borrower to maintain its financial performance
and assets at all times to an extent sufficient for the borrower to be able to repay the loan.
Fulfilment of such covenants may be measured based on the borrower’s EBITDA (which is the
aggregate of the borrower’s net income before taxation, interest, depreciation and amortisation) or
 the aggregate value of its tangible assets, although other variables may also be taken into
consideration. For example, the loan agreement may state that the borrower must at all times
maintain the ratio of its EBITDA and tangible assets, respectively, at a ratio of 2:1 to the outstanding
facility, or higher.

Equity cures are not commonly used to rectify breaches of financial covenants. When financial
covenants are breached, the borrower will usually negotiate with the lender to obtain a waiver for
such breach. In the absence of such waiver, the lender has the right to declare loan acceleration or
an event of default.

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40. Describe any other covenants restricting the operation of the debtor’s business 
commonly included in the bank loan documentation.

In the operation of its business, the debtor is bound to abide by covenants that typically (i) prohibit
the borrower from entering into any transactions with any party except on an arm’s-length basis,
(ii) require the borrower to comply with all relevant laws and regulations (including tax laws) and
refrain from taking any action that may breach any condition under its business licence, and (iii)
maintain its business and assets (any disposal or encumbrance of assets with a value above a
particular threshold is consequently prohibited).

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41. What types of events typically trigger mandatory prepayment requirements? May the 
debtor reinvest asset sale or casualty event proceeds in its business in lieu of prepaying
the bank loans? Describe other common exceptions to the mandatory prepayment
requirement.

A mandatory prepayment is usually triggered by a market disruption that affects the base rate
(except where the lender and the borrower can agree upon an alternative base rate), any event that
makes it illegal for the lender to extend the loan or allow such loan to remain outstanding, or a
change in the control over the borrower.

A typical mandatory prepayment clause does not express any exception. However, a mandatory
prepayment does not automatically occur as the lender’s declaration is required to trigger it. In
reality, banks will likely consider various factors (eg, future business with the borrower) and try to
figure out alternative ways before they eventually declare a mandatory prepayment.

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42. Describe generally the debtor’s indemnification and expense reimbursement 

obligations, referencing any common exceptions to these obligations.

The debtor often (if not always) indemnifies the lender against (i) taxes imposed on amounts
payable to the lender, (ii) obligations to pay transaction costs and enforcement fees, and (iii)
currency risks, if the loan is denominated in foreign currency.

* The information contained in this chapter is accurate as of August 2016.

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