Pefindo lowers rating of pulp and paper firms

JAKARTA (JP): Local rating agency Pefindo has downgraded its long-term ratings on three companies and reaffirmed five others in the pulp, paper and plywood sectors as the monetary crisis starts to bite.

The downgraded companies are Fajar Surya Wisesa, from BBB to BB+ with a negative outlook; PT Surabaya Agung Industri Pulp dan Kertas, from BB- to B with an alert negative outlook; and PT Artika Optima Inti, from BBB to BBB- with a negative outlook.

The reaffirmed companies are PT Pabrik Kertas Tjiwi Kimia, PT Pindo Deli Pulp and Paper, PT Indah Kiat Pulp and Paper -- all at A with a negative outlook -- and PT Riau Andalan Pulp and Paper at BBB+ with a stable outlook.

"The downgrade reflects primarily a deteriorating financial profile as the burden of the companies' foreign currency obligations increase due to further deterioration of the rupiah against the U.S. dollar," Pefindo said in a statement over the weekend.

The reaffirmations reflect the significant positive benefits of the companies' export receipts relative to the weakening demand and increasing burden of foreign currency obligations.

Pefindo said most companies under its review were export oriented with an average portion of 50 percent of its total output. Almost all rely heavily on foreign borrowing, accounting for 80 percent to 90 percent of their debts.

As of June 1997, Pefindo said, the pulp, paper and plywood companies it rated had US$6.2 billion in foreign currency outstanding loans.

The following is a summary of Pefindo's rating downgrade and reaffirmation on pulp, paper and plywood companies:

* Fajar Surya Wisesa, downgraded from BBB/stable to BB- /negative.

The downgraded rating reflects the impact of the monetary crisis on the company's business and financial profile. The company relies heavily on the domestic market because 65 percent of its output is sold on the domestic market. Besides, 95 percent of its debts have been secured from offshore sources. Therefore, weakening domestic demand, increasing imported raw material costs, and the increasing burden of its foreign currency obligations eroded the company's financial position.

* Surabaya Agung Industri Pulp dan Kertas, downgraded from BBB- /negative to B/alert negative.

The downgrading of the company's rating reflects an expected sharp deterioration in cash-flow protection and severe liquidity pressures due to the monetary crisis. Surabaya Agung has a vulnerable financial position because of its heavy foreign debt service burden, 80 percent of its debts, of which only a small portion have been hedged. Meanwhile, its short term debts are twice the level of its cash balance. In addition, Surabaya Agung's sales are concentrated in the domestic market and to a lesser degree in the weakening Asian markets. Furthermore, the company's cost structure is also less favorable as about 50 percent of its raw materials are imported and capacity utilization is low following the recent completion of a new paper mill.

* Artika Optima Inti, from BBB/negative to BBB-/negative

The downgrade reflects the company's somewhat deteriorating business due to the crisis and increasing foreign exchange exposure. About 80 percent of its debts are denominated in U.S. dollars, totaling $104 million as of Oct. 1997 of which $64 million will mature in 1998. Meanwhile it exports 90 percent of its products, mainly plywood, block board and others.

* Barito Pacific Timber, reaffirmed A+/stable to A+/negative

Pefindo has reaffirmed Barito Pacific's rating but changed the outlook to negative from stable. The negative outlook reflects weakening demand, due to economic downturn, in some of its major offshore markets such as Japan and South Korea. It also addresses a potential weakening cash flow protection due to an increased burden of interest and principle payments of foreign currency debts.

* Indah Kiat Pulp and Paper, Pabrik Kertas Tjiwi Kimia, Pindo Deli Pulp and Paper -- all in the Asian Pulp and Paper group -- reaffirmed from A/stable to A/negative.

The rating reflects their dominant position in the domestic market and capability of penetrating export markets, supported by unsustainable cost position and the group's vertical integration. The negative outlook, however, reflects potential weakening demand as the crisis persists, which will reduce their income from domestic and other Asian markets and in turn constrain the ability to offset their rising foreign currency obligations. (rid)