When signed in 1996, no-one could have predicted the Indonesian collapse. But the Dayabumi power project in Indonesia (Salak geothermal) continues to narrowly avoid officially going into default, with sponsors and bankers deferring payments while negotiating with the Indonesian government about unpaid invoices sent to the state-owned utility Perusahaan Listrik Negara (PLN).

The cashflow difficulties at the project surfaced once more on December 30, when Dayabumi missed a principal payment on its bank loan. A technical default would trigger a cross default clause on $150 million worth of senior secured notes due in 2010, but thus far, the banks have preferred to defer payments. Interest payments on both the notes and bank loans are current.

However, the notes themselves have their first principal payment due this June, so default still looms large on the horizon. The hope for bondholders now rests with the talks in progress with the Indonesian government.

Dayabumi, located on the island of Java, is a 165MW geothermal plant, and was built as a 50:50 joint venture between Unocal Corp and Indonesian partner PT Nusamba. It was built as an independent power project (IPP), but the financing was underpinned by a power offtake agreement, with Dayabumi invoicing the energy company Pertamina, which in turn invoices the state-owned PLN. The Ministry of Mines and Energy in turn guarateed PLN's performance under the Energy Sales Contract.

But the financial crisis in Indonesia, and the 1997 collapse of the rupiah, have hit PLN hard. Since May 1998, PLN has been paying only about 20-30% of the dollar value of the invoices sent to it. At first, the project was able to dip into the debt service reserve fund to make up the shortfall, but this was used up by March 1999.

"Geothermal reources are sold to the project from Unocal, and they have been deferring some payments for the steam sales, so there is some indirect sponsor support," explains Suzanne Smith, analyst at Standard & Poor's in Hong Kong. "There has also been a default on the bank loan principal payments, but the banks have deferred payment of principal so there is no technical default." But thus far, no comprehensive restructuring has been agreed between the various parties.

In early January, following the missed bank loan payment, S&P affirmed its CC rating on the $150 million worth of DSPL Finance senior secured notes, which are guaranteed by Dayabumi. But the outlook for the rating is still classified as negative.

Indonesia currently has a sovereign rating of CCC+ and the financial system remains in bad shape, while on the political front the country is also plagued by fighting between different ethnic groups. However, an economic recovery is underway, and during 2000 the country's GDP is forecast to grow 4%. But with PLN itself in such poor financial shape, S&P believes that "the dim prospects for full payment from the project's sole offtaker, PLN, and virtually no liquidity in the project, increase the probability of imminent default on the notes".

However, there is some case for optimism from lenders and noteholders, and even if a default rating cannot be avoided, they may yet be able to work things through with limited losses. The project itself continues to operate well, with almost full load factors. In addition, Unocal remains committed to Dayabumi, and is actively involved in the talks with the government. One important factor is that the new Indonesian leaders who have ruled for the past four months, led by president Adurrahman Wahid, seem more willing to co-operate with multilaterals such as the IMF and World Bank, and may also play a stronger role in sorting out the various disputes between commercial banks and state-owned entities such as PLN.

Other IPPs in Indonesia have also been hard hit by the economic crisis, and overbuilding, coupled with a slump in demand because of the recession, mean that power generated by new projects is simply not needed at present.

But, at least where US Exim is involved, the Indonesian government is trying to reach some sort of compromise. In December, Exim announced that it was extending the availability of its loan for the Paiton power project to December 2000, to provide the project with additional time to demonstrate its financial viability and economic sustainability.

In 1995, Exim had provided $540 million worth of political risk coverage to Paiton to help its construction, and at that time also approved a 12-year direct loan to take out the construction financing at time of completion. The original deadline for this take out was October 15, 1999.

Paiton was the first IPP in Indonesia, and Exim still hopes that as the project is restructured and the economy improves it will be possible to get the project back on track. Meanwhile, the signs of cooperation from the Indonesian government are ensuring bilateral financial support continues in other sectors. In December, Exim agreed a loan, plus a separate loan guarantee, for flag carrier Garuda to purchase six Boeing 737-300s and five 737-500s, needed to provide important links between Indonesia's scattered islands at a time when many domestic airlines have ceased or curtailed operations.

"We continue to look for ways to finance creditworthy transactions in Indonesia, as the Indonesian government's economic reforms continue to move forward," US Exim chairman James Harmon said in December as the Garuda loan was signed.