Reference no: EM133119195
Read the following article carefully and answer the question.
"Fitch Downgrades Waskita Karya to 'CCC+(idn)"
Tue 06 Oct, 2020 - 5:55 AM ET Fitch Ratings - Jakarta - 06 Oct 2020: Fitch Ratings Indonesia has downgrade Indonesia-based contractor PT Waskita Karya (Persero) Tbk's (WSKT) National LongTerm Rating to 'CCC+(idn)' from 'B(idn)'. At the same time, the agency has downgraded WSKT's senior unsecured note programme and the notes issued under the programme to 'CCC(idn)' from 'B-(idn)'. All ratings were removed from Rating Watch Negative (RWN), on which they were placed on 19 August 2020.
The downgrade follows Fitch's revision of WSKT's Standalone Credit Profile (SCP) to 'cc(idn)' from 'ccc-(idn)'. Fitch believes that the IDR2.5 trillion in short-term bridging loans that WSKT secured will support the company's repayment of IDR2.5 trillion of bonds due in October 2020 - IDR1,369 billion on 6 October and IDR1,150 billion on 16 October. However, liquidity pressure and refinancing risk remain high due to the company's weakened cash position and upcoming debt maturities, which include supply chain financing of IDR5 trillion in 4Q20 and bonds of IDR1.2 trillion in February 2021.
WSKT's National Long-Term Rating benefits from a three-notch uplift from its SCP for government support, driven by WSKT's support score under our Government-Related Entities Rating Criteria of 15. Fitch views that there is 'Strong' control by the government and 'Moderate' socio-political and financial implications in the event of a default. Fitch also assesses support expectations as 'Weak' as liquidity will remain under pressure following a delay in government support for the company. At the same time, the company's cash flow generation has deteriorated during the coronavirus pandemic. However, the rating uplift still reflects Fitch's expectation that the government will continue to monitor WSKT's on-going liquidity position and provide meaningful support when needed. ...
'CCC' National Ratings denote a very high level of default risk relative to other issuers or obligations in the same country or monetary union.
Source: https://www.fitchratings.com/research/corporate-finance/fitchdowngrades-waskita-karya-to-ccc-idn-06-10-2020
Instruction:
Based on the illustration (article), how does the use of current liabilities (e.g., short term loans) enhance profitability and also increase the firm's risk of default on its financial obligations? provide brief analysis and examples that would explain the pros and cons of using current liabilities in terms of risks and profitability.
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