Fitch Affirms and Withdraws Barito Pacific's Rating

(Fitch Ratings - Singapore - 15 Feb 2021) Fitch Ratings has affirmed Indonesia-based PT Barito Pacific Tbk's Long-Term Issuer Default Rating at 'B' with a Stable Outlook. Fitch has simultaneously withdrawn the rating.

Barito's rating benefits from its diversified presence across the petrochemical and energy sectors, its leading market position as Indonesia's largest petrochemical producer and strong record in geothermal operations, with long-term contracts driving stable revenue. The rating also reflects Barito's fractured shareholding in key operational subsidiaries and low holding-company interest cover.

Barito, as a holding company, relies on cash from its subsidiaries, PT Chandra Asri Petrochemical Tbk (CAP, BB-/Stable) and Star Energy Group Holdings Pte Limited. Fitch assesses the Barito group's credit profile at 'b+' and rates Barito one notch below at 'B', with the two subsidiaries proportionately consolidated, in light of the fractured shareholding in CAP and Star Energy, its key businesses, and cash flow subordination arising from restrictive covenants on debt at the operating entities.

Fitch is withdrawing the rating of Barito as it is no longer considered by Fitch to be relevant to the agency's coverage because the entity is no longer issuing offshore debt.

KEY RATING DRIVERS

Diversified Businesses: Barito's investments are diversified among petrochemicals through CAP, and power through Star Energy, the largest Indonesian geothermal energy producer. We expect Barito to continue to benefit from CAP's dividends, which may be volatile, and improving dividends from Star Energy.

Fractured Shareholding; Structural Subordination: Barito's access to CAP's and Star Energy's cash flow is limited by its shareholding structure. Barito effectively holds 47% of CAP and, through its 67% holding of Star Energy, effectively owns between 35%-40% of Star Energy's operating assets. The structure results in significant dividend leakage to minority shareholders, and the covenants on the debt at the operating entities limit cash leakage and lead to structural subordination. We therefore rate Barito one notch below the group credit profile.

Low Holding-Company Interest Cover: We expect the Barito holding company's interest cover to weaken to 0.8x in 2021 (2020: 1.8x), driven by an increase in interest expense after the drawdown of USD184 million from a USD253 million term-loan facility for its share of a joint venture (JV) investment in the Java9 &10 power project under PT Indo Raya Tenaga.

The interest cover is also affected by our expectation of lower dividends from CAP as tighter petrochemical spreads hit its profitability. The higher interest cover in 2020 was helped by the receipt of USD52 million in dividends from the Star Energy Geothermal (Salak-Darajat) Restricted Group (SEGSD RG, senior secured debt: BBB-/Stable) after its US dollar note issuance.

Consolidated Leverage to Improve: Fitch expects the group's net leverage - measured by net debt/EBITDA with CAP and Star Energy proportionately consolidated - to decline to 4.1x in 2021 after rising to 5.0x in 2020 (2019: 3.7x) because of a recovery in CAP's operating performance. Net leverage in 2020 jumped due to an increase in borrowings at the Barito holding-company level and lower EBITDA generation at CAP.

Stable Geothermal Operations: Star Energy's established operations and long-term contracts with PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable), which have residual terms of 20 years or more, result in stable revenue and cash flow, enhancing Barito's consolidated credit profile. Star Energy's operations benefit from high availability, inherently low operating costs and the long operating history of its assets. We expect Star Energy's financial performance to be stable with EBITDA generation of around USD410 million per annum.

Weak Linkage with CAP: We assess the linkage between CAP and its largest shareholder, Barito, as 'Weak', due to a financial profile divergence and evidence of ring-fencing to prevent material cash leakage. CAP's capacity to make restricted payments under the bond covenants, based on 50% of consolidated net income, has dropped due to a net loss in 9M20. CAP did not pay final dividends in 1H20 due to weak product spreads and instead used part of its cash balance to prepay long-term borrowings, while we expect the Barito holding company's borrowings to rise.

Moderate Spreads at CAP: We expect spreads to stay low for most petrochemical products affected by demand reduction amid the coronavirus pandemic and supply issues from global capacity additions. Average product spreads fell sharply in 9M20, resulting in CAP's EBITDA margin falling to 5.2%. We estimate CAP's EBITDA margin remained low at 6.8% in 2020 (2019: 9.3%), before improving to 9.9% in 2021 with the stabilisation of supply and demand of petrochemical products.

CAP2 Capex Delay: CAP expects capex to be delayed and the final investment decision (FID) for its second petrochemical complex, CAP2, to be pushed to 2022 because of coronavirus-related volatility. We expect pre-FID CAP2 capex of around USD300 million to be incurred in 2021 and 2022. We estimate total investment cost for CAP2 to be around USD5 billion, but have only factored in pre-FID capex - mainly land acquisition costs - in our analysis, as the project's ownership and funding structure have yet to be finalised.

DERIVATION SUMMARY

Barito's ratings reflect its diversified petrochemical and energy businesses - it has the largest petrochemical and geothermal operations in Indonesia. The ratings also factor in Barito's moderate financial profile (with CAP and Star Energy proportionately consolidated), its fractured shareholding in key operating subsidiaries and subordination due to cash flow restrictions arising from debt at its operating subsidiaries.

Golden Energy and Resources Limited's (GEAR, B+/Stable) financial profile is stronger than that of Barito group's financial profile (with CAP and Star Energy proportionately consolidated), although the diversification of Barito's cash flow results in a similar assessment of their group credit profiles.

However, Barito's fractured shareholding and structural subordination result in a rating that is one notch below its group credit profile. In comparison, GEAR is rated at the same level as its 67%-owned coal subsidiary, PT Golden Energy Mines Tbk (GEMS, B+/Stable), reflecting the absence of material debt at GEMS and stronger access to cash flow, as the subsidiary's policy of high dividend payouts explains the one-notch difference between GEAR and Barito.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

- Marginal improvement in CAP's petrochemical product margins (spreads) in 2021 to USD83/ton (2020: USD51/ton)

- CAP's dividend payout ratio of 40% in 2021 and 2022, no payouts in 2020

- Capex of around USD500 million until 2022, of which USD360 million will be incurred by CAP and the balance by Star Energy

- Star Energy's units operating at an average availability rate of around 94%

- Tariffs in line with PLN's long-term contracts

- Dividend received from Star Energy to range from USD25 million to USD30 million in 2021 and 2022

RATING SENSITIVITIES

Rating sensitivities are no longer relevant as the rating has been withdrawn.

 

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Manageable Holding-Company Liquidity: We estimate the holding company's cash balance of about USD80 million at end-2020 and dividends of USD33 million from Star Energy and CAP will be sufficient to cover its scheduled debt repayment of about USD50 million and interest costs of about USD28 million over the next 12 months. Fitch expects Barito to be able to raise the funds as a result of its sound access to bank funding and record of timely fund raising from the debt and equity markets.

Barito's liquidity was boosted by the receipt of USD114 million in June 2020 from the warrants exercised by two large shareholders. In addition to the USD253 million Bangkok Bank facility, Barito raised USD52 million from the rupiah bond market in 2020.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)