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)