Fitch Affirms Indonesia's Pelindo II at 'BBB-'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based port operator PT Pelabuhan Indonesia II (Persero)'s (Pelindo II) Long-Term Foreign-Currency Issuer Default Rating at 'BBB-'. The Outlook is Stable. The agency has also affirmed Pelindo II's senior unsecured rating and the rating on its senior unsecured notes of USD1.1bn due 2025 and USD500m due 2045 at 'BBB-'.
The 'BBB-' ratings reflect Pelindo II's standalone credit profile, which benefits from its strong market position with limited competition in the regions of its operation, above 90% volumes from production and consumption in the hinterland, a degree of independence in tariff setting, and stable operating cash flows. The standalone rating is constrained by Pelindo II's large capex programme, which will lead to sizeable negative free cash flows over the medium term. The rating would benefit from up to two notches of uplift if its standalone credit profile falls below that of its 100% shareholder, the Republic of Indonesia (BBB-/Stable), due to its strategic importance to the state.
KEY RATING DRIVERS
Strong Market Position: Pelindo II is the largest port operator in Indonesia accounting for about 45% of the country's total container volumes in 2015, and over 90% of container traffic in its regions of operation, which include Jakarta and West Java. Pelindo II is well placed to maintain its position because of the importance of sea freight in cargo transport across the Indonesian archipelago; Pelindo II's first-mover advantage, strategically located and well connected ports; high barriers to entry, underdeveloped road infrastructure, and the company's intensive investment plan.
Robust Business Profile: Over 90% of the cargo handled by Pelindo II is either produced or consumed in its hinterland, so it has significantly less exposure to more volatile transhipment volumes relative to most ports in Asia. The group's container traffic expanded at a CAGR of about 8% a year over 2009-2014. The economic slowdown in Indonesia in 2015 affected volumes of the country's port operators, including those of Pelindo II. Its container volumes declined by around 8% in 2015. However, we expect growth to return and average in the mid-single digits per year over 2016 to 2019. This will be driven by a gradual recovery in Indonesia's economic growth, which will be supported by continued infrastructure spending. Pelindo II will also benefit from the start of its new 51%-owned container terminal, PT New Priok Container Terminal One (NPCT1), which has capacity of 1.5m twenty-foot equivalent units (TEU), in August 2016. The stability of Pelindo II's operating margin benefits from the tariffs, agreed on commercial terms with port users in consultation with Indonesia's Ministry of Transportation.
Stable Cash Generation: Fitch expects Pelindo II's EBITDA to rise to IDR4trn in 2017 from IDR2trn in 2014, driven mainly by fixed annual rental income from its joint ventures (JVs). Fitch estimates the rental income will account for over 55% of its 2017 EBITDA. The rental income follows the renegotiation of its concessions with Hutchison Port Holdings for its 48.9%-owned PT Jakarta International Container Terminal (JICT) and 54.91%-owned Kerjasama Operasi Terminal Petikemas Koja (KOJA) for an additional 20 years, upon their expiry in 2019. Under the new agreements, Pelindo II collected upfront fees (USD265m in 2015), and it started receiving from July 2015 higher rental income instead of revenue-based royalties - though lower dividends. Pelindo II has a similar arrangement for NPCT1, and the terminal will contribute USD14m of rent per quarter from January 2017, up from the USD7m per quarter from August 2016. These payments are received in US dollars, which supports the company's largely US dollar-denominated debt obligations.
High Utilisation, High Capex: Fitch expects Pelindo II to incur a total capex of IDR24trn against cash flow from operations and upfront fees of around IDR12trn over 2016-19. Pelindo II's existing terminals are highly utilised and it will require new capacity to accommodate expected volume growth. Its business profile and finances benefit from its sub-concession model, where a large portion of capex is borne by its JV partners.
High Forecast Leverage: Fitch expects Pelindo II's FFO-adjusted net leverage to increase to about 4.0x by 2018, from 2.5x in 2015, due to its large capex programme. The company raised USD1.6bn via issuance of bonds in 2015 and had cash balances of IDR19trn at December 2015. Hence Fitch does not expect the company to need any additional funding to support its current investment plan through 2019. Fitch expects Pelindo II's FFO fixed charge-coverage to remain above 2.5x in the medium term.
Sovereign Linkage and Support: Pelindo II's ratings would benefit from up to two notches of uplift in the event its standalone rating falls below that of Indonesia due to the strategic importance of its ports, in line with Fitch's Parent and Subsidiary Linkage methodology. The group's expansion plan reflects the government's strategy of improving Indonesia's infrastructure.
Fitch's key assumptions within our rating case for the issuer include:
- Annual container volume growth to average in the mid-single digits from 2016, supported by capacity additions over the medium term
- Annual rental income from its joint ventures; USD120m from JICT and KOJA from July 2015; USD14m a quarter from NPCT1 from January 2017, up from USD7m per quarter from August 2016
- Total capex of IDR24trn over 2016-2019, leading to negative free cash generation during this period. High capex to cater to volume growth, with the expansion of its Tanjung Priok terminal to account for most of its capex.
- No additional borrowings till 2019
Negative: Future developments that may collectively or individually lead to negative rating actions include:
- Negative rating action on the sovereign
- A sustained weakening of Pelindo II's FFO-adjusted net leverage above 4.5x and/or FFO fixed charge coverage below 2.5x, will lead to downgrade of Pelindo II's standalone rating. However, up to two notches of support will be provided if the rating linkages between the company and the state remain intact. This support is not currently applicable as the company's standalone rating is equivalent to that of Indonesia.
Positive: Future developments that may collectively or individually lead to positive rating actions include
- Positive rating action on the sovereign could lead to an upgrade provided Pelindo II's linkages with the state remain intact
- Fitch does not anticipate positive rating action on Pelindo II's standalone rating in the medium term given its high capex and resultant large negative free cash flow.
For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 6 November 2015:
The main factors that, individually or collectively, could trigger negative rating action are:
- A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties, for example as a result of an undue change in the authorities' monetary policy strategy focussing on stability.
- A rise in the public debt burden, for example caused by breaching the budget deficit ceiling.
The main factors that, individually or collectively, could trigger positive rating action are:
- A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign-investor sentiment, for instance through lower commodity export dependence or structurally higher FDI inflows.
- Evidence that structural reforms or improvements in infrastructure translate into higher sustainable GDP growth in the longer run.