Standard & Poor's waffling on RI rating irks the market
Standard & Poor's waffling on RI rating irks the market
HONG KONG (Dow Jones): A rapid about-face by Standard & Poor's
on Indonesia this week gave the Asian debt market ratings
whiplash, prompting participants to once again pile criticism on
the agency.
On Tuesday, S&P lowered Indonesia's long-term foreign currency
rating to a new level of SD, or "selective default," after the
country said it was rescheduling the outstanding portion of a
US$350 million syndicated loan. But only a day later, S&P
restored Indonesia's previous triple-C-plus rating after it
reviewed the details of the restructuring plan.
"This is a big screw-up by S&P," said Daniel Lian, head of
Asian markets research at ANZ Bank in Singapore, who said the
flip-flop showed S&P wasn't close enough to the creditors to be
aware of all the terms of the restructuring.
The agency defended its actions, arguing that in its
definition of the term, Indonesia had defaulted.
"The Indonesian government did the things we categorize as
default," said Takahira Ogawa, S&P's Singapore-based sovereign
ratings analyst. "Because of the difficulty in obtaining
information, we had to do this."
He said the government had informed it verbally of the terms
and conditions of the loan on Monday, a day after they took
effect. Despite this, S&P lowered the rating, noting that it
still didn't have all of the loan documentation.
When it received this from the government on Tuesday, the
agency reset the rating on Wednesday.
But as well as alarming market watchers, the move sparked the
ire of the government, which insisted it hadn't defaulted and was
simply rescheduling debt in agreement with its creditors. Still,
S&P insisted that it had no alternative.
"They have their own position," Ogawa said. "We actually
understand what (the government) would like to say, but on the
other hand, we are in accordance with our criteria."
The affair prompted market participants to compare this week's
behavior with that of the ratings agencies earlier in the Asian
crisis, when a series of rapid downgrades were blamed for causing
panic selling across Asian markets.
Lian said that while S&P clearly "performs a very essential
service," this week's action dealt another blow to its
credibility.
"I think it's irresponsible," a Hong Kong-based bond fund
manager agreed.
A bond trader at a European bank in Hong Kong also criticized
the move, but noted that this time the market impact was
negligible. "Theoretical changes by the rating agencies don't
make a bit of difference."
His conclusion was supported by the lack of market reaction to
the ratings flip-flop. Buoyed by other positive factors, the
Indonesian rupiah surged early Tuesday after the S&P ratings cut
before slipping back to Rp 8,742 to the U.S. dollar, from
Rp 8,850 in the previous session. Since the country's ratings
were so low to begin with, the foreign exchange market shrugged
off the downgrade, traders said.
Indonesia's Yankee bond due 2006, which S&P affirmed at
triple-C-plus when it cut the country to 'SD,' widened slightly
Wednesday to 965 basis points over U.S. Treasurys from 950 basis
points in the previous session, but kept well within the 980
basis point spread seen last week.
Ironically, S&P intended the 'SD' rating, which it created in
January, to symbolize its "commitment to providing the market
with useful and consistent information."
The agency assigns the rating when it believes the obliger has
selectively defaulted on a specific issue or class of obligations
but will continue to make timely payments on its other
obligations.
Such circumstances increasingly characterize defaults of
sovereign governments or other obligers in emerging markets. And
that's exactly what S&P said happened with Indonesia this week.
The country agreed with the 70-bank strong syndicate that
arranged the US$350 million loan to effectively extend the
maturity to 11.1 years, from an original seven years.
Under S&P's new criteria, the agency had to declare a
"selective default"- even though it knew it would restore
Indonesia's credit rating once it reviewed the completed
restructuring agreement.
"If the borrower actually proposes to the creditors
restructuring of the loan - either the extension of the maturity
or less favorable interest payments - we categorize it as
default," Ogawa said
S&P then reset the rating Wednesday after it learned that all
70 creditor banks agreed to the rescheduling amendment.
Because of the agreement, S&P said "Indonesia's sovereign
default is cured."
To be sure, the ratings agency did get understanding from some
analysts.
"A strict reading of it is they're doing exactly what they'd
said they'd do: following the restructuring announcement, they
put Indonesia on selective default, saying they'd revisit the
rating as soon as they'd received the documentation," said the
head of fixed-income research at a European bank in Singapore.
"S&P is quite legalistic & sticks to the letter of the law."
He says that in this case, the specter of "selective default"
may have helped motivate the borrower and its creditors to get
the new documentation to S&P as quickly as possible.
But analysts also echoed traders' comments in saying that in
this case S&P strict rules caused more harm than good.
"It is a bit disconcerting to the market," the Singapore-based
analyst said.
S&P's Ogawa also admitted that earlier in the crisis - given
the volatility of Indonesia's currency - the impact of its flip-
flop could have been disastrous.
"Of course, in the earlier days of the crisis it was a much
more different situation," Ogawa said. "But we cannot be more
favorable to one country over another."