Obtaining credit harder after downgrade

Obtaining credit harder after downgrade

SINGAPORE (Reuters): Indonesia's latest credit rating downgrade signals concern going beyond its already battered corporate borrowers, economists said yesterday.

U.S. rating agency Standard & Poor's (S&P) said on Friday it had cut its rating for the Republic of Indonesia's US$400 million Yankee bond due 2006 to triple-'C'-plus from single-'B'-minus.

It made a similar cut in its long-term foreign currency credit rating on the republic and lowered its long-term local currency rating to single-'B'-minus from single-'B'-plus.

The ratings remained on CreditWatch with negative implications, where they were placed on January 9, it said.

"The downgrades reflect Indonesia's deepening political crisis, which in turn is further eroding its ability to service public sector obligations," S&P said.

"S&P is just reflecting the reality of the deteriorating situation in Indonesia," said Andy Tan, Singapore general manager at MMS, an affiliate of S&P.

The announcement followed days of rioting across the sprawling archipelago which left hundreds of people dead and scores of charred and ruined buildings in the capital Jakarta.

S&P also cut its long-term foreign currency rating on telecommunications giant PT Satelit Palapa Indonesia (Satelindo) to CCC-minus from B minus.

A triple-'C' rating suggests a perceived possibility of default. Timely repayment of the principal debt and the interest is seen as dependent on favorable business, economic or financial conditions.

An S&P single-'B' indicates an investment risk and repayment is not sufficiently protected against adverse changes in conditions.

Uncertainties related to the possibility President Soeharto would leave office, triggered by violent social unrest, have overshadowed progress towards macroeconomic stabilization, the agency said.

As a result, both the government's policy targets and the external financial support linked to the International Monetary Fund (IMF) program are in jeopardy, it said.

And if the government's ability to pay its dues is stretched, the security of Indonesia's $80 billion of corporate debt appears even more dubious, analysts said.

Many of Indonesia's large companies are now technically bankrupt since the collapse in the Indonesian rupiah. The currency has lost about three-quarters of its value since the beginning of the Asian financial crisis in July last year.

Even before last week's downgrade, a lot of Indonesian debt papers were rated well below "investment grade" -- ratings from triple-'A' to triple-'B'-- which is the grade at which it is safe for an institution holding investors' money to look.

"If you are an institution and you have any papers that are triple-'C', you shouldn't be holding them, because that means there is a serious risk of default," said Chia Woon Khien, head of Asian research at SE Banken in Singapore.

But she said some players in the debt market would still have to sell Indonesian debt after the ratings cut.

"There will be dumping of anything Indonesian," she said. "There is a gray area between investment grade and junk bond status, but these ratings are now as good as junk."

Tan said he did not think the Indonesian economy or its ratings would recover any time soon. This meant it would be even more difficult for Indonesian companies to carry on their normal business -- which inevitably involves borrowing -- after the dust had settled.

"It would definitely make it much more difficult for Indonesian companies to raise funds. But a lot of the Indonesian companies have already gone below the investment grading," he said. "They have just gone from bad to worse."