Demand for rating on the rise but concerns emerge

Demand for rating on the rise but concerns emerge

JAKARTA (JP): Pursuing a rating in a bid to raise funds
overseas has become a trend here as elsewhere in the Asia Pacific
region. But there is increasing concern about this development.

The demand for rating in the region is projected to soar in
line with the region's need for substantial infrastructure
funding and the need to diversify funding sources.

To date, most business expansions have been funded through the
raising of equity and bank lending, but commercial reality and
market experience suggest that massive expansion plans will
necessitate much greater issues of debt instruments to meet
financing needs.

Corporate, utilities and financial institutions are expected
to be at the forefront of the demand for rating, especially in
Indonesia, China, Hong Kong, Malaysia, South Korea and Taiwan.

"There is a huge pool of capital in the United States. I think
to attract that capital, Indonesian companies need to be rated,"
Premod P. Thomas, finance manager of publicly-listed PT Semen
Cibinong, said at a panel discussion here last week.

However, some still question the need for such rating by
foreign agencies, on the grounds that it often underestimates a
company when the company is located in a country with a low
sovereign rating.

"They are not qualified to rank Indonesian firms, actually.
They are like foreigners coming here. They do not have a clue of
what goes on behind the scenes, let alone how to rank local
firms," said another panelist, Bien Kiat Tan, chief operating
officer of publicly-listed Ometraco Corporation.

Tan questioned the sovereign rating as a determinant factor in
judging a company's creditworthiness. Creditworthiness of
Indonesian firms is largely related to Indonesian sovereign risk,
which affects pricing, he said.

As rating activities in Asia, as elsewhere, are predominantly
investor-driven -- and will continue to be so -- benefits exist
for the borrower with a better rating: the borrower will attract
larger and more diversified investors, allowing longer-term
maturities and lower interest. However, companies with lower
ratings will pay more for finance.

"Surely there are flaws in this rationale. Look at regional
firms. They go beyond Indonesia, and the rating agencies should
look into that issue also," Tan said.

He suggested that regional-level companies should raise funds
overseas without involving any rating agency. He is confident
that, as long as they have good reputation, they will be able to
do so.

Tan explained that when Ometraco Corporation planned to launch
global notes, it decided not to have its notes rated. "And we
managed to get a fair price, which we might not have if we'd gone
to a rating agency first."

Commenting on Tan's criticism, Graeme Lee, managing director
of Standard & Poor's (S&P) Australia, noted that many of the
economic features that go into a sovereign rating also affect
private companies operating in that country.

"You can't ignore the Indonesian rating, which is influenced
by the structure of the economy, because the same structure will
influence corporate and private entities as well," Lee told
journalists after the discussion.

"When we rate a foreign currency issue, we can't rate that
particular issue separately from the sovereign rating because of
the sovereign access to control foreign exchange and all other
sorts of things," he continued.

Principles

He said that S&P adheres to principles of independence,
objectivity, credibility and full disclosure. Its letter-grade
ratings (ranging from the best, AAA to the worst, D) represent an
opinion of creditworthiness derived from a formal analytical
framework that includes both qualitative and quantitative
criteria.

"I don't think we have any bias, we spend as much time as the
company needs, to get to understand the company, the industry it
operates in, the country it operates in, and so forth. This is
one of the advantages of doing rating at a company's request,"
Lee said.

Rating

S&P has so far rated nine Indonesian firms. These are AAP
International Finance B.V. (guaranteed by Asia Pulp & Paper Co.
Ltd.), Matahari International Finance Co. B.V. (guaranteed by PT
Matahari Putra Prima), Paiton Energy Funding B.V. (guaranteed by
PT Paiton Energy Corp.), PT Indah Kiat Pulp & Paper Corp., PT
Inti Indorayon Utama, PT Pabrik Kertas Tjiwi Kimia, PT Ploysindo
Eka Perkasa, RAPP International Finance Co. B.V. (guaranteed by
PT Riau Andalan Pulp & Paper) and PT H.M. Sampoerna.

Most of the companies were rated below Indonesia's sovereign
rating.

S&P has also evaluated the credit risks of 15 Indonesian
banks, including five state-owned banks and 10 of the largest
private banks -- but not at their request. None of them got
"satisfactory" ratings, having to make do with either "adequate"
or "vulnerable."

Lee said that any rating is purely the view of the rating
agency, and therefore other people are free to accept it or not.
"It is probably natural that the entities rated have different
views to the rating agency's."

However, it is a fact that most investors use the opinion of
the rating agency as their guide to price certain debt
instruments, Tan said.

"What's saddening is that the rating agency is treated like
the bible," Tan contended. "There is a certain amount of
subjectivity in the rating. So please keep an open mind."

He argued that there is also some amount of subjectivity when
it comes to sovereign rating. There is a common assumption that
Indonesia is more developed than China but less so than Malaysia,
Thailand and Singapore. Therefore, when a rating agency comes to
those countries, it will bring with it such common assumptions.

"I think there are certain preconceived concepts in rating a
country, based on a certain assumption," Tan said, adding that
such preconceptions will affect its rating of a certain country.

Disagreeing with Tan's argument, Lee said that rating agencies
try to provide an overview between different forms of investment.

"It is a very big responsibility, and that's why we take it
very seriously," he said.

He said sovereign rating is one area that S&P is very
centralized. It has a group of sovereign specialists based in New
York. The company has so far rated 58 countries.

"We monitor and review this rating constantly, and we go
through a review at least once a year. We would have two or three
sovereign analysts coming to Indonesia for review purposes," Lee
said.

In April 1995, S&P upgraded its long-term foreign currency
debt rating for Indonesia to BBB from BBB- and revised its
outlook to "stable" from "positive."

"In nearly all markets outside the United States, anything
that is not an A rating people think that is a poor rating. In
our view, triple B is a good rating, a strong rating," Lee said,
adding that the median corporate rating for corporations in the
United States is BB+ or BBB-. (rid)