Rating commercial paper
Rating commercial paper
The central bank's ruling imposing stricter requirements on
the issuance and trading of commercial paper has at least two main
objectives: To protect both investors and banks and to bring
Indonesia's commercial paper market up to international
standards.
As stipulated in Decree No.28/52 of Bank Indonesia's Board of
Directors, dated Aug. 11, 1995, the tougher requirements -- such
as compulsory credit rating of commercial paper issued by non-
bank companies and the obligation of full disclosure imposed on
issuers -- are all designed to provide investors and banks with a
framework of risk assessment to help them manage potential loss
on their investments.
Why banks? Because banks usually act as the arrangers and
issuing and paying agents of commercial paper and so are often
exposed to risk.
There is a potential conflict of interest for banks involved
in the issuance or trading of commercial paper. The issuers may
belong to the same business group as the controllers or owners of
the bank. This possibility is recognized in the central bank's
prohibition of a bank's acting as the arranger, paying and
issuing agent or buyer of commercial paper issued by companies
belonging to the same group as that to which the bank belongs.
The tougher rules on commercial paper are imperative now,
especially as an increasing number of companies are resorting to
unsecured short-term debt instruments to raise funds. Commercial
papers with maturities of up to 270 days are often much more
flexible than bank loans and their rates are often lower than
bank lending rates. However, since commercial papers are not
secured and they are mostly discounted in the financial market,
there is a greater risk of investment losses in case of default.
It is for this reason that compulsory credit rating is important.
Obviously, credit rating means an added cost for commercial
paper issuers. But, at the same time, issuers stand to benefit
from easier access to capital, lower borrowing costs and enhanced
financial flexibility. Issuers also find ratings particularly
useful in entering new markets where they are not well known.
A problem, however, is that there is currently only one
credit-rating agency, PT Pefindo, already licensed by the
government and recognized by the Capital Market Supervisory
Agency. Pefindo, which is owned jointly by state banks, members
of the Jakarta Stock Exchange and various other financial
institutions and pension funds, started operations only late last
year.
The central bank is apparently fully aware of Pefindo's
limitations. Commercial papers issued prior to Aug. 11 have until
Feb. 1, 1996, to comply with the new rules. Those issued after
Aug. 11 are obliged to fulfill all the provisions of the new
regulation, except the compulsory credit rating.
It is to be hoped that PT Pefindo will be able to increase its
credit analysis capacity within the next few months. If it cannot
do so, the commercial paper market will be adversely affected.
After all, commercial paper is only one of many financing
alternatives. If companies have to wait for several months to
have their commercial papers rated, or the cost of the credit-
rating process makes borrowing through the issuance of commercial
paper expensive, companies will simply raise funds by other
means.
The credit rating requirement on commercial papers makes it
even more urgent than before that the government facilitate the
establishment of at least one additional credit rating agency.
Investors do not want to rely on only one agency. They tend to
feel more secure if there are at least two independent agencies
to analyze the creditworthiness of a company. After all, the
best-quality product is mostly one made under market competition.