A group of banks is pleading with state-owned Saudi Telecom Company (STC) to put more money into its Indonesian arm, Axis, to rescue an underperforming loan that lenders fear will otherwise have to be restructured.

The debt problem is a rare sign of trouble at any of Saudi Arabia’s largest government-owned companies, often referred to as Saudi Inc.

The problems relate to a $1.2bn deal STC signed to fund the expansion of Axis in May 2011, including a $450m bank tranche provided by Sabb, the local arm of the UK’s HSBC, and Germany’s Deutsche Bank.

Bankers in the kingdom say that although the loan is not yet in default, it is worryingly underperforming the projections made when the deal was signed. “It is a potential default, not yet an actual default,” says one banker at an international bank.

Sources in the kingdom say both HSBC and Deutsche Bank are petitioning STC to put more funding into Axis to help it meet its obligations. So far STC has refused. The dispute about how much STC is expected to provide financial help to Axis hinges on a comfort letter provided by STC to the lenders. Comfort letters are typically provided when a parent company is unwilling to guarantee the debt of a subsidiary, but wants to demonstrate that it is committed to some operational support.

“The comfort letter sets out a specific level of equity support from STC to Axis,” says one banker in Riyadh with exposure to the deal. “That amount has already been injected by STC so we do not expect to get anything else off the back of this letter.”

“STC’s position is that you have a comfort letter, so from their point of view they have given all the support they are obliged to,” One bank with exposure to the deal says, “In reality we do not expect to get any money off the back of the comfort letter.”

The lenders to Axis are still trying to get STC to put more funding into the Indonesian firm, fearing that the transaction will soon go into default. “Comfort letters are pretty rare in Saudi Arabia and the hope is that STC will see that this means it has a moral obligation to guarantee the debt, even if it’s not a legal one,” says one banker close to STC. What the next step for the lenders will be is unclear though, as the comfort letter is not legally enforceable, so the banks are having to rely on moral persuasion to get a bailout for Axis.

The rest of the $1.2bn loan comes from export credit agencies (ECAs). It is unclear what the status of the ECA tranches is.

HSBC had been trying to get local banks to fund the deal in 2010, but failed to get any interest because of the lack of a formal repayment guarantee from STC. Eventually HSBC closed the $450m bank loan with Deutsche Bank in May 2011. “The business plan that STC had put together for Axis was always ambitious,” says one banker in Riyadh who says he has declined to join the deal several times. “Axis is a minor player in an overcrowded market where gaining market share is really difficult. The Saudi banks don’t know Indonesia and without a stronger guarantee from STC most banks decided not to go near this”

There are ten mobile operators competing for customers in Indonesia. Axis is also partly owned by Malaysia’s Maxis Communications.

HSBC and Deutsche Bank tried again to syndicate the deal in mid-2011 and are understood to have successfully sold a small amount of their exposure to some Saudi banks. Senior bankers in the kingdom say that as recently as early 2013 the two banks were still trying to offload some of their exposure to this deal.

STC, HSBC and Deutsche Bank all declined to comment.