CAPS OFF
Some companies are breaking the sovereign barrier on their credit rating.
By Jasper Moiseiwitsch

Asian companies are busting a barrier long thought unbreachable: the sovereign cap. Tellingly, these events are happening within countries with strict foreign currency controls.

This January, for example, the Indian financial institution ICICI was upgraded by Moody's to Ba1 - a notch above the country's sovereign rating of Ba2. The Malaysian oil company Petroliam Nasional (Petronas) was upgraded by Moody's to a sovereign-besting Baa1 (Malaysia's country rating stands at Baa2) last July.

Then, in March, another energy concern, the China National Offshore Oil Corporation (CNOOC), achieved a pricing that beats the official agency rating for China. Officially CNOOC is deemed by Standard & Poor's to reside at the BBB level, the same as the People's Republic. But in March 2002 the oil firm launched a US$500 million bond issue that achieved the pricing of an AA-rated company, in the range between SingTel and Hutchison. The market, it seems, just ignored the agency rating and gave it the pricing that the investment-grade concern deserves. "Our rating is B2 (Moody's) and BBB (S&P). But the market looks at CNOOC as a more credible company [than the rating indicates]," says Zongwei Xiao, CNOOC's head of investor relations.

Apart from its strong corporate governance and solid profitability, CNOOC trades in a commodity that is priced in greenbacks. Even though 80 percent of CNOOC's oil output goes to the domestic market, it prices at the international, US-denominated rate. This assures investors of CNOOC's ability to service foreign debt. Adds Xiao: "We can sell our products anywhere we want - if [the price is] higher overseas, we will sell there."

CNOOC's pricing says more about the market's relationship to the ratings agencies than that company's relationship to the mainland. CNOOC's bond issue priced at 163 basis points over US treasuries, which suggests a better rating than the sovereign. But then China ten-year sovereigns trade at about a 90-basis point spread over treasuries - better even than CNOOC. Investors regularly discount the agency ratings on China and Chinese companies, which generally reflect a more conservative view on mainland risk.

Meanwhile, Standard & Poor's rates three other Asian companies above their home country. Not surprisingly, they all belong to everyone's favorite basketcase, Indonesia, which sets a particularly low ratings threshold. The companies are: Hanjaya Mandala Sampoerna, a tobacco firm, Bank Mandiri and Medco Energi Internasional. Medco is the best of the bunch. Like CNOOC, it's an oil company and it's rated B+ - not great, but better than Indonesia's CCC country rating.

To understand how companies have come to beat the sovereign cap, it helps to know why it was imposed in the first place. Until about ten years ago, most central banks operated as the exclusive clearing agent for foreign exchange, says Coughlin. The banks were obliged to sell their foreign dollars to this institution, which acted as the sole forex repository. If the government had a foreign debt repayment 'problem', it would stop selling foreign exchange to private companies. Rather, it would conserve forex for essential imports or for priority creditors such as the World Bank. Local companies with their own foreign currency-denominated obligations no longer had access to dollars to service their debts.

What's changing now is the controls on foreign exchange. Specifically, liberalized forex markets mean that governments no longer control all forex reserves in their country. Local corporates retain the freedom (and responsibility) to repay foreign debt regardless of the chaos that unfolds on the home front. Governments may default on their debt but may no longer act to draw in private sector players.

Accordingly, the sovereign cap is only relevant in the three Asian countries that continue to impose currency controls: China, Malaysia and India. But even for these regimes it's clear the cap is less rule than rule-of-thumb.

Jasper Moiseiwitsch is a freelance writer for CFO Asia based in Hong Kong.