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."