Some firms in better position to repay debt: S&P

JAKARTA (JP): The credit quality of Indonesian corporations remains weak but some companies are in a better position to meet outstanding debt obligations in a timely manner, according to the Standard & Poor's rating agency.

Ee-Lin Tan, the agency's Singapore-based associate, said companies which sell predominantly to the domestic market and maintain significant U.S. dollar cost structures were the most vulnerable.

"With the decimation of general purchasing power resulting from the depreciation of the rupiah since mid-1997, the inability of domestic customers to absorb input price increases can lead to modest and sometimes even negative operating cash flows," she said in a statement.

Tan said export-oriented companies, or those with significant investments in foreign markets, which are able to diversify revenue generation, redirect sales, and earn hard currencies, coupled with a competitive cost position, were more likely to generate a continuous stream of cash flow despite a weak pricing environment.

However, Asia, especially China, which represents an important market for many of these companies and their operating cash flow, was vulnerable to any economic setback suffered by the region, causing a decline in demand for their products, she said.

"The liquidity position of many Indonesian corporations is extremely modest, signaling that near-term changes in market conditions could determine their ability to continue operations and to meet financial obligations on a timely basis. Liquidity is highly dependent on the strength of the rupiah as a considerable portion of liquid resources is held in the domestic currency," Tan said.

Although possessing moderate leverage, several companies face limited financial flexibility and are highly dependent on their creditors' consent for debt restructuring in order to continue operations, she noted.

"Despite the prevalence of such capital restructuring initiatives among Indonesian companies, any delay in a successful resolution will affect credit quality adversely," Tan said.

She explained that the limited lending capacity of domestic banks and foreign banks' limited willingness to extend credit to Indonesian corporations had added to liquidity problems and were hampering a recovery of credit quality. With limited financial flexibility, cash flow could be disrupted or reduced as production rates drop from a lack of working capital sources.

Tan also noted that the commissioning of new capacities by many Indonesian companies were delayed to conserve cash.

"Many companies have returned to the sale of oncore assets to raise funds. Low asset values in the region have become very attractive, promoting the acquisitions of minority stakes in domestic companies by foreign investors," she added.

Tan said that those companies which had taken active steps to incorporate strategic efficiency measures and asset rationalization initiatives, and that possess healthier capital structures, were more likely to overcome the operating uncertainties in the near to medium term.

"Credit quality also may be enhanced if excess cash is used to retire debt, a step that would strengthen debt protection measures," she said.

The political climate also would continue to play a major factor in determining creditworthiness, she said.

Tan warned that despite the relatively peaceful political transition at the presidential elections in October and a cessation to civil unrest, Indonesian ratings could face further downgrades if the political environment deteriorated or the new government was unable to restore private sector confidence.

In 1998, civil unrest resulted in severe disruption to distribution networks and led to the shutdown of several operating units.(hen)