S&P: Gajah Tunggal on watch

Standard & Poor's said it placed the B long-term corporate credit rating on PT Gajah Tunggal Tbk. on CreditWatch with negative implications, along with the B rating on its senior secured notes.

The CreditWatch reflects the risk that the company's liquidity could significantly weaken if its recent dividend payment constitutes a covenant breach under the terms of its 2009 restructured bonds, S&P said.

On June 30, Gajah Tunggal paid Rp 41.8 billion in dividends out of its 2010 profits. The company made the payment before July 21, 2011, the date on which the interest rate on the restructured bonds will increase to 6% from 5%, the agency said.

S&P said it needs more clarity on whether such action constitutes a covenant breach.

Gajah Tunggal does not consider the dividend payment as a covenant breach and has indicated that it will issue a formal response to its bondholders, the agency said.

The ratings reflect the company's highly leveraged financial risk profile, its exposure to a cyclical and volatile industry and its limited financial flexibility, S&P said.

Gajah Tunggal's competitive cost position and leading share in the Indonesian tire market temper these weaknesses, the agency said.

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