S&P: Sritex 'BB-' Rating On CreditWatch Negative As We Assess Potential Impact Of Debt-Funded Expansion At Sister Company
"We placed the ratings on CreditWatch negative as we assess the credit implications for Sritex of the completion of a rayon plant by a related company," said S&P Global Ratings credit analyst Eric Nietsch.
PT Rayon Utama Makmur (RUM) is completing construction of an 80,000 ton rayon plant in Indonesia. We estimate that the plant costs US$250 million and we understand that the majority of that cost is being funded with debt. The plant is likely to be completed by the end of 2016, and we assume debt will likely be fully drawn down for the project over the coming weeks. At the same time, operation of the plant has yet to start. While we understand that Sritex will be an off-taker of the plant when it starts operations, we are yet to obtain visibility on any additional customers, production ramp-up, and ultimately the economic viability and profitability of the venture.
In our view, the combination of substantial debt at RUM and likely operational linkage should the plant become a strategic supplier of raw material to Sritex, could translate into rising event risk at Sritex. Given both companies have a common ultimate majority ownership, we also believe Sritex may have an incentive to support RUM, within the bounds of its debt covenants. In addition, it remains unclear at this stage how the financial standing of RUM could indirectly influence market confidence in Sritex and its access to capital.
We will seek to receive additional information to better assess the interdependence between RUM and Sritex. We will also review the level of information transparency regarding Sritex and RUM business dealings.
We expect to resolve the CreditWatch by the end of the year pending further discussions with Sritex's management and additional operational and financial information regarding RUM.
An assessment of heighted operational and financial interdependence between Sritex and RUM, or a lack of transparency regarding Sritex and RUM business dealings could lead us to lower the rating by one or two notches.
We could affirm the rating with a stable outlook if we obtain further comfort about RUM's operations and finances. This would require us to be confident that RUM's operations and finances are self-sustaining and insulated such that they are unlikely to impact directly or indirectly Sritex's margins, cash flows, leverage, or liquidity. An affirmation of the rating with a stable outlook would also be contingent upon sustained performance at Sritex and a continuation of its progress toward improving its working capital management.