Fitch Affirms Indonesia's Pelindo III at 'BBB-'/Stable
OREANDA-NEWS. Fitch Ratings has affirmed Indonesia-based port operator PT Pelabuhan Indonesia III (Persero)'s (Pelindo III) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. The agency has also affirmed Pelindo III's senior unsecured rating and the rating on the USD500m senior unsecured notes due 2024 at 'BBB-'.
Fitch has lowered Pelindo III's standalone rating to 'BB+' from 'BBB-'. The 'BBB-' IDR and senior unsecured rating now incorporate one notch of support from its 100% shareholder, the Republic of Indonesia (BBB-/Stable), due to the strategic and operational linkages between the two as per Fitch's Parent and Subsidiary Linkage methodology. The company's standalone credit profile was lowered due to Fitch's expectation of weaker credit metrics over 2016-19. Slower volume growth, broadly flat average realised tariffs in local-currency terms, despite a weaker Indonesian rupiah against the US dollar, and substantial capex led to a weaker financial profile than Fitch had expected. The company's credit profile continues to benefit from its strong market position with limited competition, above 90% volumes from production and consumption in the hinterland, and a degree of independence in tariff setting.
KEY RATING DRIVERS
Lower-Than-Forecast Volumes: Pelindo III reported steady container volumes of 4.4 million twenty-foot equivalent units (TEUs) in 2015. Fitch expected Pelindo III to achieve volume growth in 2015, partly aided by the additional capacity at its new terminal, Teluk Lamong. Fitch has revised down its forecast volume growth to average around 7% a year over 2016-2019, reflecting the slower, but gradually improving economic growth expected for Indonesia, which will be partly supported by continued spending on infrastructure.
Weaker Rupiah, Flat Average Tariffs: Fitch estimates that about 35% of Pelindo III's revenue is US dollar-denominated. However, Fitch expects average tariffs to remain broadly stable in rupiah terms, even though the US dollar has strengthened against the Indonesian currency. This is because there is a larger share of domestic containers in the mix and the domestic tariffs are lower, at about 70%-90% of international tariffs.
High Forecast Capex: Pelindo III has a high capex programme, although the company has adjusted its medium-term plan to reduce investments in further new capacity and focus more on investments to revitalise and improve efficiency at its existing operations in 2016 and 2017. The capex is largely US dollar-linked, so the depreciation of the rupiah has increased its investment requirement in local-currency terms. Fitch expects Pelindo III to incur a total capex of around IDR17trn against cash flow from operations of around IDR9trn over 2016-19.
Credit Metrics Weakened: Fitch now estimates Pelindo III's FFO-adjusted net leverage to be around 5.5x-5.0x through 2018, up from 3.6x in 2015 due to its large capex programme as well as weaker than previously forecast cash generation. Fitch also expects Pelindo III's FFO fixed-charge coverage to remain at 2.0x in the short to medium term while it undertakes debt-funded capital expenditure.
About 50% of Pelindo III's consolidated 2015 EBITDA was derived from its 50.5%-owned subsidiary, PT Terminal Petikemas Surabaya (TPS). DP World Limited (BBB-/Positive) owns 49% of TPS and manages it. Fitch adjusts for this by excluding the FFO and cash balances of TPS, but adding back the dividends Pelindo III receives from TPS to the consolidated financials. TPS is debt-free and upstreams a large share of its cash. This, together with the 10% royalty TPS pays to Pelindo III on its revenues, materially reduces the negative implications of this asset not being fully owned by the company. The leverage and coverage ratios calculated for Pelindo III are based on this adjusted FFO.
The concession for TPS expires in 2019, at which point Pelindo III has the right to acquire DP World's 49% stake under an agreed framework. Based on the details of the broad framework, Fitch believes that access to 100% of TPS's cash generation will outweigh the likely cash payment to acquire DP World's stake.
Strong Market Position: Pelindo III is the second-largest container port operator in Indonesia, accounting for about 33% of the country's total container volumes, and over 90% of container traffic in its regions of operation - central and eastern Indonesia. Given the importance of sea freight in cargo transport across the Indonesian archipelago, Pelindo III's first mover advantage, strategically located and well-connected ports, high barriers to entry, underdeveloped road infrastructure, and the company's intensive investment plan, Pelindo III is well placed to maintain its position, in our view.
Robust Business Profile: Over 90% of cargo handled by Pelindo III 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. Pelindo III's operating margin is stable because the tariffs are agreed on commercial terms with port users, in consultation with Indonesia's Ministry of Transportation. EBITDA margins were about 43%-44% over 2012-2014. Margin was, however, lower at 40% in 2015, mainly due to higher expenses incurred for its Surabaya West Access Channel project. Fitch expects a gradual recovery in the margin to about 47% through 2019, driven mainly by efficiency gains.
Sovereign Linkage and Support: Pelindo III's rating benefits from one notch of support due to its strategic importance to the state. A further notch of uplift is available, in the event its standalone rating falls further, 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. The government appoints Pelindo III's management.
Fitch's key assumptions within our rating case for the issuer include:
- Average container volumes and tariff growth of 7% and 6% a year over 2016-19
- EBITDA margin to gradually increase to 47% by 2019 from 40% in 2015
- Total capex of IDR17trn over 2016-2019, leading to negative free cash flow during this period.
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 III's FFO-adjusted net leverage above 5.5x and/or FFO fixed-charge coverage below 2.0x will result in lowering of Pelindo III's standalone rating, but a further notch of uplift is available, provided there is no weakening of linkages with the state
Positive: Future developments that may collectively or individually lead to positive rating actions include:
- A sustained improvement of Pelindo III's FFO-adjusted net leverage below 4.5x and/or FFO fixed-charge coverage above 2.5x will result in an upgrade of Pelindo III's standalone rating
- A positive rating action on Indonesia can lead to a similar rating action on Pelindo III, provided its standalone credit profile does not deteriorate and its linkages with the state do not weaken
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.