S&P gives Barito Pacific BB'-plus rating

JAKARTA (JP): Standard & Poor's said yesterday it assigned its double-B'-plus corporate credit rating to PT Barito Pacific Timber (BPT).

According to the rating agency, the outlook is stable,.

The rating reflects BPT's solid position in global hardwood plywood markets supported by long-term, secure access to low cost and abundant forest resources, and a moderate attitude to finance asset growth, the agency's statement said.

The rating also reflects the risks associated with the planned construction of a large-scale pulp mill, to be operational by the end of 1999.

Currently solid finances will likely deteriorate, on a consolidated basis, over the period 1997 to 1999 as the pulp mill is constructed.

BPT is a significant entity in the Barito Pacific Group (the group), a family-controlled group with diverse forestry, petrochemical, manufacturing, and property interests, based in Indonesia.

The group also has significant minority investments in several large Indonesian groups. These groups do not have any cross- shareholdings with BPT, nor does BPT or the group guarantee the obligations of these companies.

Secure access to fast-growth forest resources ensures BPT can sustain its position as a low cost plywood producer over the long term. BPT is Indonesia's largest hardwood plywood manufacturer, exporting about 90 percent of its production, primarily to the Asian region.

While globally, plywood consumption growth is exhibiting maturity, and some vulnerability to substitute panels, Indonesia's low-cost position has resulted in its industry continuing to grow at the expense of higher cost producers.

Plywood prices can be volatile, reacting to the purchasing behavior of the largest importer countries, Japan and China.

Indonesia's single desk export marketing association, Apkindo, has demonstrated some influence over pricing dynamics, leading to price stability relative to other globally traded forest products.

Since listing as a public company in 1993, BPT has maintained significant liquidity and only modest debt levels. The IPO provided the funds to permit the company to further develop its forestry concessions, to reduce debt, and to provide the equity for the pulp mill.

Over the next two to three years, while the pulp mill is being constructed, BPT's finances will likely deteriorate, though remain satisfactory for the rating.

BPT has no experience in pulp manufacture and marketing. However, BPT is mitigating the risks of entering a new forestry sector through securing fiber supply from its own plantation acacia forest, entering a fixed price turnkey construction contract with an experienced contractor, bringing in partners experienced in pulp mill management and pulp marketing, funding 70 percent of the project with long term funds under which there is limited recourse to the shareholders, and securing markets for all of the mill's pulp through take-or- pay contracts with two customers.

Nevertheless, the construction and commissioning risks for the pulp mill are significant.

Standard & Poor's expects the company will leverage its balance sheet over the long term up to 50 percent, consolidating the pulp mill. Leverage at this level, and likely cash flow and interest cover protection, will likely limit the rating to the present category. Yet the rating provides BPT with the latitude to pursue its strategic growth ambitions leveraging off the forest resources, Standard & Poor's said.