In early December 1995, Panin Bank was faced with an investment decision. Panin bank had US$ 3 million in hand and had to decide whether to invest in US dollar or in Indonesian Rupiah.

The alternatives Panin Bank had at that time was to invest the fund in the convertible notes of Lippo Treasury Limited -incorporated in British Virgin Islands -which was priced lower at 90% because of the rumour spreading that Lippo Group was having a financial problem after the property market slowed down. The Convertible Notes carry a 1.25% p.a coupon paid semi-annually and a put option at the end of year 1998 to sell the notes to me issuer at the rate of 128%. The Notes is guaranteed by The Lippo Limited -incorporated in Hongkong. .

The second alternative came from the Union Bank of Switzerland, Singapore branch. UBS offered Panin Bank to buy the Notes at par and swap the coupon received semi-annually with an interest of 6-month LIBOR + 700 bp for three years until the end of year 1998. UBS will repurchase the Notes at par after the three year period.

The third alternative more or less was the same with the second one, except it was denominated in Rupiah and the coupon payment received was swapped with the interest of 24.75% for three years until the end of year 1998. Like the second alternative, UBS will repurchase the Notes at par after the three year period.

All the three alternatives looked interesting, but every alternative carried a different and significant risks. One of the important risk is the political risk that is in July 1997, the Hongkong sovereignty will revert back to the PRC government from the UK. There are many uncertainties on the future of Hongkong under the PRC, even between the PRC and UK there is an agreement to keep Hongkong as a special region of the PRC.



Research Location: Panin Bank

Supervisor: Prof. Dr. Wagiono Ismangil

Accepted on 1996



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