Bangkok--11 Dec--Moody's Investors Service
Moody's Investors Service has determined that a new regulation from Indonesia's tax authorities will have little or no rating impact on the outstanding bonds of any of the 20 Indonesian issuers it rates, according to a new report.
"The Indonesian tax authorities have closed a loophole that had allowed Indonesian bond issuers to avoid payment on much -- or all -- of a 20% withholding tax on interest paid to foreign bondholders," writes Ivan Palacios, Moody's AVP-Analyst and co-author of the report.
"But in our view the additional interest expenses will have little or no rating impact on the 20 Moody's-rated Indonesian cross-border issuers, as the new regulation, if fully imposed at the 20% level, will add only a few million U.S. dollars in additional interest costs for each of the issuers Moody's rates."
"This would be an unwelcome expense," says Gary Lau, Moody's Senior Vice President, adding that, "we believe, however, that the extra burden will represent an average of only 1% or so of the amount of outstanding cross-border bonds -- which won't materially affect the debt coverage metrics that factor into our ratings."
The added costs could mean that future refinancing of cross-border debt will rely more on bank loans or domestic bonds, which could inhibit new issuance. Moreover, recent news reports have indicated that some issuers may consider a buyback of cross-border bonds.
This shift could have negative implications on debt maturity profiles and increase companies' refinancing risk in the future if the buybacks are funded predominantly by shorter tenor bank loans.
However, other factors, such as the very low global interest-rate environment, the strong financial performance of many Indonesian corporates, and favorable currency movements, may also play into an issuer's decision to call a cross-border bond, particularly those denominated in U.S. dollars -- a trend that the new tax ruling may accelerate.
"Regardless, in our view, Indonesia will remain an attractive destination for foreign capital, given the improvement in the country's macroeconomic and political environments, which led to our recent one-notch upgrade to its sovereign rating," Palacios writes.
The report, "Indonesia: No Rating Impact from Tax on Cross-Border Debt," can be accessed at www.moodys.com.
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Singapore
Ivan Palacios
Asst Vice President - Analyst
Corporate Finance Group
Moody's Singapore Pte Ltd.
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Hong Kong
Gary Lau
Senior Vice President
Corporate Finance Group
Moody's Asia Pacific Ltd.
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