Sovereign wealth fund CIC at risk with Bumi investment

Sovereign wealth fund China Investment Corp (CIC) risks sinking deeper into the quagmire of its investment in Bumi Resources, Indonesia's biggest coal miner, which is beset by financial woes and allegations of environmental damage.

Bumi is Indonesia's largest thermal coal producer and one of the top three largest thermal coal exporters by tonnage globally. In September 2009, CIC lent US$1.9 billion to Bumi, a risky move since Bumi has incurred a lot of debt over the past decade.

Bumi defaulted by missing a principal payment on US$375 million of convertible bonds on August 12, according to Moody's.

"We … believe that the investment in Bumi Resources might be one of the high-risk bad investments referred to in the National Audit Office report. CIC's investment in Bumi is a great example of CIC's lack of due diligence," said Aviva Imhof, coordinator of Australian environmental charity the Sunrise Project.

"The missed principal payment on the convertible bonds also triggers an event of default under its US$300 million senior secured notes due 2016 and its US$700 million senior secured notes due 2017," Moody's said.

By acquiring shares in Bumi and its subsidiaries, CIC has become even more vulnerable to Bumi's distressed financial state.

"By entering into the debt-equity swap, CIC is saving Bumi from bankruptcy, and becoming more liable for their environmental and social wrongdoing," said Imhof.