Rating the debtors

Rating the debtors

Credit Rating Indonesia Ltd., which was set up early this year, is
expected to begin operating soon after the recent issuance of two
regulations on the role, function and operational mechanism of rating
institutions in the capital market. Credit rating and research has
indeed become a much-needed service in the capital market due to the
increasing popularity of debt instruments as a source of fresh funds for
investments.

One may argue that demand for rating is not so urgent yet because
domestic investors have never experienced actual credit losses on debt
securities. But since the cumulative amount of rupiah bonds issued
through the Jakarta Stock Exchange has exceeded Rp 5.05 trillion (US$2.3
billion), not including another Rp 500 billion to be floated by the
State Electricity Company later this month, a credit rating agency is
really needed to help investors to manage the risks of their investments
in bonds and to promote a bond secondary market, which is virtually non-
existent at the moment.

Judging from the tough requirements imposed by the Capital Market
Supervisory Agency (Bapepam) on the credit rating agency, we feel
assured that Credit Rating Indonesia Ltd., locally known by its acronym,
"Pefindo", will likely be able to provide credit assessment with the
quality, reliability and credibility needed both by debtors and
investors.

Bapepam has ruled that a credit rating agency must be objective,
independent and professional in its credit assessment and must make the
method of its assessment transparent. Obviously, a credit rating agency
must have the freedom to express its opinion on the issuers of debt
instruments. Within the Indonesian business scheme of things, such
independence is very crucial. Past experiences have shown that the
political connections of a company often blunt the professional
judgment of bankers or auditors.

Transparency also is vital for enabling issuers of debt instruments
to know exactly how their credibility is assessed. Investors, too,
should understand how the rating system operates in order to be able to
understand and consequently to react appropriately to the rating
agency's opinions.

A note of caution is in order here. Investors should be informed that
a rating is an opinion which measures the risk that a given issuer of
debt instruments may default on the payment of the principal or interest
over the life of the rated instruments. Ratings serve as a form of
protection for the investors, but the ratings should not be mistaken for
a guarantee against losses. What is sure is that the ratings will be
greatly helpful for investors in managing potential risks.

We reckon that Pefindo, which is owned jointly by several state
banks, pension funds, the Jakarta and Surabaya stock exchanges and a
securities company, will cooperate with a foreign credit rating agency
for at least the first few years to improve the skills of its staff and
to establish its credibility among foreign investors.

For sure, Pefindo will contribute to the development of a better
credit information system in Indonesia. Investors will be helped to
better manage their investment risks. The ratings will also help issuers
of debt instruments to attract more investors and will secure them
better access to cheaper capital and lower borrowing costs.