HONG KONG (BLOOMBERG) – Investors on a call in July with distressed Indonesia textile firm PT Delta Merlin Dunia Tekstil were confounded – how could the company’s fortunes have turned so fast?

They’re still searching for answers, in a case that’s revived concerns about a lack of transparency in corners of Asia’s credit markets. The saga has also highlighted risks of more scares ahead as the trade war and mounting geopolitical concerns reverse a rally in junk debt.

Delta Merlin’s dollar bonds have suffered a stunning slump of 85 cents to 15 cents since being sold just in March, making them the worst-performing junk notes in Asia this year.

It’s rare for companies to miss debt payments shortly after issuing securities, but that’s just what happened in Delta Merlin’s case. Four months before the investor call, the company sold the US$300 million bond to global investors, whose orders of more than US$1 billion showed eagerness at a time when riskier bonds were red-hot throughout the region.

Indonesia’s national police are investigating PT Duniatex, the parent, according to Helmy Santika, the crime division’s deputy director for economic crime, without providing more details as to any allegations.

Even before the first coupon deadline, the manufacturer showed signs of being in trouble, after another company within the closely held Duniatex group missed a loan payment.

In August, Delta Merlin reassured investors it was “largely ring-fenced from the default” of other entities within the group, meaning that its assets are financially separated. But this month, the weaving firm founded by Indonesia’s Sumitro family failed to pay a coupon on its dollar bonds.

‘HARD REALITIES’

Global investors are watching the case closely, to see how foreign creditors will be treated as the company restructures its debt. South-east Asia’s biggest economy is trying to boost investment from overseas to counter risks of a recession as growth slows. It’s also a cautionary tale for foreign investors looking to buy riskier bonds from the nation, which had a wave of defaults a few years back.

“Delta Merlin Dunia teaches a new generation of the hard realities of high-yield Indonesian bonds,” said Owen Gallimore, head of credit strategy at Australia & New Zealand Banking Group.

Parent Duniatex was founded in 1974, and consists of six companies wholly-owned by the Sumitro family with over 50,000 employees, according to Delta Merlin’s bond prospectus.

The company cited US-China trade war trade tensions and an influx of imported Chinese textile products in Indonesia as reasons for its difficulties. Delta Merlin also told investors that it incurred hedging losses as forward currency contracts matured “out-of-the-money.”

“We think that would cause a decline in profits and margins, but not a liquidity crunch,” said Leonard Law, analyst at Lucror Analytics. “It’s hard to tell what exactly went wrong with the company because it’s privately held.”

A communications manager at Duniatex couldn’t immediately be reached for comment.

Delta Merlin’s textile peers such as Pan Brothers and Sri Rejeki Isman, also known as Sritex, haven’t suffered the same problems. Delta Merlin said that both companies have been able to benefit from the influx of Chinese textile products as their businesses are export oriented, whereas the majority of Duniatex group’s business is domestic.

‘SIGNIFICANT CONCERNS’

Recouping money could be a challenging task for Delta Merlin’s bondholders and lenders.

A supplier to Delta Merlin, with claims of 1.7 billion rupiah (S$170,000), this month filed an application seeking a court supervised debt moratorium just days before the coupon was due. The debt moratorium, known as PKPU, involves a suspension of payments.

“Foreign creditors may have significant concerns over Indonesian courts,” said Reshmi Khurana, managing director and head, South-east Asia, in the business intelligence and investigations practice at Kroll. “The challenge for foreign investors is that transparency of information flow may be limited and they can be disadvantaged compared to local stakeholders.”