According to the Asian Development Bank (ADB), as of 30 June 2020, the total outstanding balance of tradable Indonesian government bonds stood at $217 billion, while outstanding corporate bonds were valued at $30.12 billion. As the market continues to grow, credit rating agencies’ role is a necessary accompaniment to bond issuance following the regulatory authorities’ policy. Investors most often use credit ratings to assess risks and compare different issuers and securities when making investment decisions and managing their portfolios.
Nevertheless, credit rating is a highly concentrated industry, with the “Big Three” rating agencies controlling approximately 95% of the business globally. Moody’s Investors Service and Standard & Poor’s (S&P) together hold 80% of the global market, and Fitch Ratings controls a further 15%.
However, in Indonesia, PT Pemeringkat Efek Indonesia (Pefindo) has successfully gained the domestic market’s trust and broke the Big Three’s domination by accounting for an 81.7% market share in the local corporate debt market. Pefindo is the only locally-owned credit rating agency acknowledged by the Financial Services Authority (OJK) and Bank Indonesia.
Pefindo was established on 21 December 1993, through the initiative of the Capital Market Supervisory Agency (now the OJK) and Bank Indonesia. The company is owned by 86 entities with Bank Indonesia’s Pension Fund Institution and PT Bursa Efek Indonesia (BEI) as the majority shareholders with 22.69% and 32.37% of ownership, respectively.
“Basically, we assess companies’ financial strength, especially their ability to meet payments, of principal and interest, of their debts. The rating assigned to a given debt shows an agency’s level of confidence that the borrower will honor its debt obligations as agreed,” says Pefindo president director Salyadi Saputra.
Currently, the agency rates short term debt, long term debt, local currency debt, and also provides a stand-alone rating. Pefindo applies its own methodology in measuring creditworthiness and uses a specific rating scale to publish its ratings opinions. Typically, ratings are expressed as letter grades that range, for example, from ‘AAA’ to ‘D’ to communicate the agency’s view of the relative level of credit risk.
Beside debt rating activities, Pefindo also publishes credit outlook information on the corporate bond issuer and their reference sectors. This outlook reflects the probability for nonpayment of debt; it relies on financial and accounting parameters and data analysis.
“Technically, this rating compares the company’s ability to provide cash that will be used to pay its obligations in the future,” he says.
Apart from the corporate and debt rating, Pefindo also saw high demand for individual credit rating. The company later established a business unit PT Pefindo Biro Kredit in 2014 and officially gained permission from OJK in 2015.
Pefindo Biro Kredit collects individual credit data from financial institutions and non-credit data from several public agencies and institutions to legally access a person’s creditworthiness. Salyadi acknowledges that the rating methodology keeps developing in line with the trend rating agency industry. To enhance the rating methodology and criteria as well as the rating process, Pefindo continues to actively participate in the Asian Credit Rating Agencies Association (ACRAA). For more than 26 years, Pefindo has rated more than 700 financial and non-financial companies, including state-owned enterprises (SOEs).
Pefindo also gained support from the World Bank and the Asian Development Bank to develop the municipal bond market. It has, in fact, conducted regional government bonds rating since 2012.
“We update and refine our processes, from time to time, to align with new developments in the marketplace, enabling us to offer insightful opinions that help market participants make more informed investment decisions,” says Salyadi.
In the current pandemic, Salyadi sees that corporate bond issuance will likely decline this year as many companies shelve plans to seek funding because of unfavorable global economic conditions. The slow turn in bond issuance will impact Pefindo’s revenue by 40% this year, according to Salyadi.
The company usually receives payment for its services either from the issuer that requests the rating or subscribers who receive the published ratings and related credit reports. Last year, Pefindo managed to book operating revenues of Rp129.88 billion in 2019, a 41.4% increase from Rp91.83 billion in 2018. During the first half of 2020, Pefindo has also downgraded 16 companies due to the crisis and gave a negative outlook for 42 companies.
In this crisis, Salyadi admits that crisis-induced downgrades can undermine economic fundamentals since rating agencies have tremendous power to influence market expectations and investors’ portfolio allocation decisions. Therefore Pefindo focuses on giving a transparent rating to the investors, with objectivity and independence remain a top priority.
“In a crisis, investors want information about relative strengths and weaknesses, not just downgrades,” he says.
Salyadi says the company has taken some steps to protect against potential conflicts of interest since it is paid by bond issuers. For example, these measures include a clear separation of function between those who negotiate the business terms for the rating assignment and the analysts who conduct the credit analysis and provide the opinion for the ratings.
“This separation is similar in concept to the way newspapers distinguish their editorial and advertising sales functions since they make reports on companies from which they may also collect advertising fees. Also, to manage potential conflicts of interest, we established clearly defined policies and procedures, and made its rating criteria transparent and freely available,” he says.