S&P: Decision may chill interest in Indonesian bonds

S&P said it views the decision by the Indonesian Supreme Court, which invalidated the $500 million bonds issued by PT Indah Kiat Pulp & Paper Corp. Tbk., a subsidiary of Indonesia-based Asia Pulp & Paper Co. Ltd., as a critical indicator of the legal and regulatory risks faced by investors in Indonesian bonds and the obstacles in enforcing creditors' rights under default conditions.

S&P said it considers this an isolated incident of application of legal provisions and not a potentially material adverse development for all bonds issued by Indonesia-based entities. The corporate guarantee and the special purpose vehicle structure, which has been put to question under this judgment, are widely used for offshore foreign-currency bonds issued by Indonesian corporates and banks. For such transactions, the ratings assigned by S&P not only factor in the presence of the guarantee from the Indonesian entity to the special purpose vehicle, but the ability and the willingness of the issuer to honor debt obligations in a timely manner.

It is unclear whether this ruling potentially nullifies similar structures, the agency said. From this perspective, S&P said it does not view this judgment to result in a weakening of ability or willingness to service off-shore debt, specifically as Indonesian entities are aligning with the international capital markets and have a strong incentive to service their debt.

S&P believes this can dampen investor appetite for Indonesian bonds, which has witnessed significantly wider acceptance in the past year, and possibly weaken the financial flexibility for Indonesia-based entities.

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