Indonesian bond market shrugs off upgrade talk

Indonesian bond market shrugs off upgrade talk

HONG KONG (Reuters): Indonesian sovereign and major corporate debt shrugged off comments by a major ratings agency that the country may be upgraded from its current 'Selective Default (SD)' level.

However, dealers noted the Indonesian debt market tends to be dominated by high yield accounts based in the U.S., and rarely moves much in the Asian time zone and any upgrade would have little effect.

"I think it's been priced in to be honest," said one senior bond trader at a European bank.

"It's a supply and demand market. Once you can see a U.S. investor who wants to buy, they can move the price by three full points," the trader said.

Spreads of Indonesia's benchmark sovereign 7.75 percent bond due 2006 have tightened recently along with the general improvement in Asian credits. Currently the bonds are quoted around 615 basis points over equivalent U.S. Treasuries against more than 650 basis points over at the end of May.

Talk of a sovereign upgrade for Indonesia surfaced after the government and the London Club of commercial creditors agreed on a proposal to reschedule some US$340 million in debts.

The proposal covers two loans of some $140 million and $200 million that would have fallen due through March 31, 2002.

The news follows April's agreement with the Paris Club of creditors to reschedule $5.8 billion in sovereign debt.

In April S&P downgraded Indonesia's long-term foreign currency issuer credit rating to SD from CCC-plus, and its short-term foreign currency credit rating to SD from single-C.

The downgrades then reflected the fact Indonesia was effectively in default on $850 million of foreign currency commercial bank loans.

S&P's director of sovereign ratings, Takahira Ogawa, said the agency is now considering an upgrade for Indonesia back to CCC+ or B-minus, but only after the consent of all the London Club's 80 creditor is secured.

Ogawa said this meant any upgrade would not be that soon.

"Once the members agree to the loans restructuring, then they will sign (an agreement) with the government. At that time, we will consider an upgrade," he said.

Any upgrade for Indonesia will still be regarded as positive news for the country's outstanding debt, but much will depend on whether it is re-rated at only CCC-plus or higher.

"The downgrade to SD from CCC+ was itself based on a technicality, so any upgrade back to CCC+ cannot be taken to mean a significant improvement in the ratings agency's view of the country," said Raja Visweswaran, head of Asian securities research at Bank of America.

"In the event that Indonesia gets upgraded to low single-B, it will be a positive outcome for creditors as well as investors going forward," he said.

Analysts at UBS Warburg said a move to B-minus would be a positive for the sovereign and for the debt of Indonesian-based conglomerate Asia Pulp and Paper (APP), which is expected to see its ratings follow any move in the sovereign.

"The APP group debt is rated CCC-plus with a developing outlook but recall sometime back, S&P had floated the possibility of APP being rated at a higher level than the sovereign," UBS Warburg analysts said in a note clients.

"While this may not be a near term scenario, we would still expect APP to maintain its sovereign ceiling rating," UBS Warburg said.