Demand for rating on the rise but concerns emerge<\/p>\n
JAKARTA (JP): Pursuing a rating in a bid to raise funds
\noverseas has become a trend here as elsewhere in the Asia Pacific
\nregion. But there is increasing concern about this development.<\/p>\n
The demand for rating in the region is projected to soar in
\nline with the region's need for substantial infrastructure
\nfunding and the need to diversify funding sources.<\/p>\n
To date, most business expansions have been funded through the
\nraising of equity and bank lending, but commercial reality and
\nmarket experience suggest that massive expansion plans will
\nnecessitate much greater issues of debt instruments to meet
\nfinancing needs.<\/p>\n
Corporate, utilities and financial institutions are expected
\nto be at the forefront of the demand for rating, especially in
\nIndonesia, China, Hong Kong, Malaysia, South Korea and Taiwan.<\/p>\n
\"There is a huge pool of capital in the United States. I think
\nto attract that capital, Indonesian companies need to be rated,\"
\nPremod P. Thomas, finance manager of publicly-listed PT Semen
\nCibinong, said at a panel discussion here last week.<\/p>\n
However, some still question the need for such rating by
\nforeign agencies, on the grounds that it often underestimates a
\ncompany when the company is located in a country with a low
\nsovereign rating.<\/p>\n
\"They are not qualified to rank Indonesian firms, actually.
\nThey are like foreigners coming here. They do not have a clue of
\nwhat goes on behind the scenes, let alone how to rank local
\nfirms,\" said another panelist, Bien Kiat Tan, chief operating
\nofficer of publicly-listed Ometraco Corporation.<\/p>\n
Tan questioned the sovereign rating as a determinant factor in
\njudging a company's creditworthiness. Creditworthiness of
\nIndonesian firms is largely related to Indonesian sovereign risk,
\nwhich affects pricing, he said.<\/p>\n
As rating activities in Asia, as elsewhere, are predominantly
\ninvestor-driven -- and will continue to be so -- benefits exist
\nfor the borrower with a better rating: the borrower will attract
\nlarger and more diversified investors, allowing longer-term
\nmaturities and lower interest. However, companies with lower
\nratings will pay more for finance.<\/p>\n
\"Surely there are flaws in this rationale. Look at regional
\nfirms. They go beyond Indonesia, and the rating agencies should
\nlook into that issue also,\" Tan said.<\/p>\n
He suggested that regional-level companies should raise funds
\noverseas without involving any rating agency. He is confident
\nthat, as long as they have good reputation, they will be able to
\ndo so.<\/p>\n
Tan explained that when Ometraco Corporation planned to launch
\nglobal notes, it decided not to have its notes rated. \"And we
\nmanaged to get a fair price, which we might not have if we'd gone
\nto a rating agency first.\"<\/p>\n
Commenting on Tan's criticism, Graeme Lee, managing director
\nof Standard & Poor's (S&P) Australia, noted that many of the
\neconomic features that go into a sovereign rating also affect
\nprivate companies operating in that country.<\/p>\n
\"You can't ignore the Indonesian rating, which is influenced
\nby the structure of the economy, because the same structure will
\ninfluence corporate and private entities as well,\" Lee told
\njournalists after the discussion.<\/p>\n
\"When we rate a foreign currency issue, we can't rate that
\nparticular issue separately from the sovereign rating because of
\nthe sovereign access to control foreign exchange and all other
\nsorts of things,\" he continued.<\/p>\n
Principles<\/p>\n
He said that S&P adheres to principles of independence,
\nobjectivity, credibility and full disclosure. Its letter-grade
\nratings (ranging from the best, AAA to the worst, D) represent an
\nopinion of creditworthiness derived from a formal analytical
\nframework that includes both qualitative and quantitative
\ncriteria.<\/p>\n
\"I don't think we have any bias, we spend as much time as the
\ncompany needs, to get to understand the company, the industry it
\noperates in, the country it operates in, and so forth. This is
\none of the advantages of doing rating at a company's request,\"
\nLee said.<\/p>\n
Rating<\/p>\n
S&P has so far rated nine Indonesian firms. These are AAP
\nInternational Finance B.V. (guaranteed by Asia Pulp & Paper Co.
\nLtd.), Matahari International Finance Co. B.V. (guaranteed by PT
\nMatahari Putra Prima), Paiton Energy Funding B.V. (guaranteed by
\nPT Paiton Energy Corp.), PT Indah Kiat Pulp & Paper Corp., PT
\nInti Indorayon Utama, PT Pabrik Kertas Tjiwi Kimia, PT Ploysindo
\nEka Perkasa, RAPP International Finance Co. B.V. (guaranteed by
\nPT Riau Andalan Pulp & Paper) and PT H.M. Sampoerna.<\/p>\n
Most of the companies were rated below Indonesia's sovereign
\nrating.<\/p>\n
S&P has also evaluated the credit risks of 15 Indonesian
\nbanks, including five state-owned banks and 10 of the largest
\nprivate banks -- but not at their request. None of them got
\n\"satisfactory\" ratings, having to make do with either \"adequate\"
\nor \"vulnerable.\"<\/p>\n
Lee said that any rating is purely the view of the rating
\nagency, and therefore other people are free to accept it or not.
\n\"It is probably natural that the entities rated have different
\nviews to the rating agency's.\"<\/p>\n
However, it is a fact that most investors use the opinion of
\nthe rating agency as their guide to price certain debt
\ninstruments, Tan said.<\/p>\n
\"What's saddening is that the rating agency is treated like
\nthe bible,\" Tan contended. \"There is a certain amount of
\nsubjectivity in the rating. So please keep an open mind.\"<\/p>\n
He argued that there is also some amount of subjectivity when
\nit comes to sovereign rating. There is a common assumption that
\nIndonesia is more developed than China but less so than Malaysia,
\nThailand and Singapore. Therefore, when a rating agency comes to
\nthose countries, it will bring with it such common assumptions.<\/p>\n
\"I think there are certain preconceived concepts in rating a
\ncountry, based on a certain assumption,\" Tan said, adding that
\nsuch preconceptions will affect its rating of a certain country.<\/p>\n
Disagreeing with Tan's argument, Lee said that rating agencies
\ntry to provide an overview between different forms of investment.<\/p>\n
\"It is a very big responsibility, and that's why we take it
\nvery seriously,\" he said.<\/p>\n
He said sovereign rating is one area that S&P is very
\ncentralized. It has a group of sovereign specialists based in New
\nYork. The company has so far rated 58 countries.<\/p>\n
\"We monitor and review this rating constantly, and we go
\nthrough a review at least once a year. We would have two or three
\nsovereign analysts coming to Indonesia for review purposes,\" Lee
\nsaid.<\/p>\n
In April 1995, S&P upgraded its long-term foreign currency
\ndebt rating for Indonesia to BBB from BBB- and revised its
\noutlook to \"stable\" from \"positive.\"<\/p>\n
\"In nearly all markets outside the United States, anything
\nthat is not an A rating people think that is a poor rating. In
\nour view, triple B is a good rating, a strong rating,\" Lee said,
\nadding that the median corporate rating for corporations in the
\nUnited States is BB+ or BBB-. (rid)<\/p>",
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