Adhi Karya Suffers Credit Downgrade Over Possible Losses in Middle East

Janeman Latul & Aditya Wikrama

The country’s second-biggest construction company, PT Adhi Karya, will find it more difficult to obtain bank loans after its credit rating was downgraded on Wednesday.

State-owned credit rating firm PT Pefindo lowered Adhi Karya’s rating from “negative implication” to “negative outlook” because of its involvement in project disputes in the Middle East. Pefindo said the downgrade was triggered by the continuing dispute over a project in Qatar.

“The dispute could result in a substantial loss to [Adhi Karya],” Pefindo said in a statement.

The downgrade means that Adhi Karya will find it more difficult to obtain loans, especially bank loans, and would likely be required to pay a higher interest rate on any loans it was able to secure.

Adhi Karya finance director Indrajaya Manopol did not respond to repeated requests for comment by the Jakarta Globe.

Adhi Karya is currently owed about Rp 270 billion ($27.8 million) — including about Rp 40 billion in costs it has not billed — for work performed on a Shangri-La hotel in Qatar.

The contractor has ordered revisions to the project that could result in costly delays for Adhi Karya. The contractor, Al-Habtoor Engineering, also holds Adhi Karya’s $7.6 million performance bond.

Many analysts are concerned that Adhi Karya may be forced to write off some of its receivables.

“It could significantly reduce their profits,” said Chandra Pasaribu, an analyst at state-owned PT Danareksa Research Institute.

Chandra added that Adhi Karya could be forced to write off about Rp 110 billion from the project this year, including the performance bond.

Maxi Liesyaputra, an analyst at PT BNI Securities, in July estimated Adhi Karya would post a profit of Rp 147 billion this year, not taking into account the potential write-off from the Qatar project. Last year, the company posted a profit of Rp 81 billion.

Adhi Karya is also involved in difficulties with another project in Oman. Last month, Muchayat, deputy minister for the construction sector at the State Enterprises Ministry, said the company could lose as much as Rp 200 billion because of design changes on a Rp 577 billion housing development for the country’s ruler, Sultan Qaboos.

At the time, Indrajaya denied that Adhi Karya was facing potential losses from the Oman project, but acknowledged that significant delays were expected.

Muchayat said the government would require all state-owned companies planning to work on projects in the Middle East to demand cost-plus-fee contracts. These would enable the contractors to be paid for allowable expenses up to a set limit, plus an additional payment to provide a guaranteed profit.