Moody's Investors Service may cut Polysindo Eka notes

Moody's Investors Service may cut Polysindo Eka notes

NEW YORK (Reuter): Moody's Investors Service assigned a Ba3 rating to the 13 percent Guaranteed Secured Notes due 2001 of Polysindo International Finance Company B.V. (Finance) and placed under review for possible downgrade the B1 rating on the 13 percent Senior Notes due 2001 of PT Polysindo Eka Perkasa (Polysindo).

The rating actions are based on the expectation that the Polysindo's common equity base will be enhanced by its rights offering, and on the accomplishment of substantial progress in the completion of its expansion program, as well as the changes in the company's capital structure and in the seniority and collateral which is expected to accrue to some holders of the company's debt.

The rating action also reflects the decreasing significance of trade receivables from affiliated companies, the shifting focus of the group to being a vertically integrated chemical and textile manufacturer from a firm primarily focused on downstream textile operations, and the outlook for margins on products based on purified terephthalic acid ("PTA") and other polyester related products over the intermediate term.

Polysindo is currently engaged in an expansion program to significantly expand its existing polyester chip, fiber, weaving and finishing production capacity.

This production facility is expected to begin initial production this year and to be completed by mid-1997. The expansion will result in the company's focus shifting from being a textile oriented firm to one that is vertically integrated and with a greater emphasis on polyester fibers.

Moody's notes that Polysindo is likely to gain a margin advantage because of its backward integration into PTA. Nevertheless, the agency also expects that there will be global PTA production overcapacity within the next 12-18 months. Consequently, the margin advantage resulting from Polysindo's vertical integration may be reduced.

Moody's said that Polysindo's major capacity expansion and its higher growth rate, combined with lower growth rates of affiliated companies, will result in a decrease in the relative significance of the trade relationships with affiliated companies.

Consequently, the rating agency believes that the level of risk historically associated with these transactions has significantly diminished and is likely to become even less significant in the future.

In positioning the firm for future growth, Polysindo and its wholly owned subsidiary, Finance, are currently putting in place a capital structure and the requisite financing to fund the expansion program on a long-term basis.

As part of this process and in order to provide flexibility, the company is seeking to exchange the new secured Finance debt, which is guaranteed by Polysindo, for Polysindo's existing 13 percent senior notes.

The rating on the new Guaranteed Finance issue is based on the guarantee of Polysindo, the seniority of the issue and the security in facilities in Karawang, West Java, Indonesia.

The Finance issue rating also recognizes the pari passu status of this issue with that of other secured debt holders.

However, the revamping of the capital structure, the granting of collateral to holders of the Finance issue and to certain other debt holders and the concomitant significant increase in secured debt could result in the effective subordination of unsecured debt holders, including the holders of the existing 13 percent senior notes.

Moody's review of the rating on the existing 13 percent senior notes will consider the impact of the proposed exchange and the planned additional US$160 million debt offering, on the position of the holders of these existing senior notes.

Moody's said it anticipates that the rating on the existing 13 percent senior notes will be withdrawn if the full amount of this issue is exchanged for the new Finance issue.

PT Polysindo Eka Perkasa, is a vertically integrated chemical and textile manufacturer headquartered in Jakarta, Indonesia, Polysindo International Finance Company B.V. is a wholly-owned subsidiary.