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

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)