Fitch Affirms Soechi Lines at 'B'; Outlook Stable

(Fitch Ratings - Singapore - 09 January 2020)--Fitch Ratings has affirmed Indonesia-based tanker operator PT Soechi Lines Tbk's (Soechi) Long-Term Issuer Default Rating (IDR) at 'B'. The Outlook is Stable.

Fitch has also affirmed the rating on the USD200 million 8.375% senior unsecured notes due 2023 issued by wholly owned subsidiary Soechi Capital Pte. Ltd., and guaranteed by Soechi and all its operating subsidiaries, at 'B' with a Recovery Rating of 'RR4'.

Soechi's EBITDA and leverage improved in 9M19, driven by higher earnings from its shipping business and a significant cut in capex. Annualised 9M19 EBITDA was up 12% compared with 2018 and we estimate 2019 FFO-adjusted net leverage fell to 4.4x (2018: 5.2x,) helped by a 65% reduction in capex, including upfront docking charges. However, Soechi's shipyard business continues to remain a drag with minimal earnings contribution despite significant capex. Soechi also has significant bank debt maturities in 3Q21, which will have to be addressed through refinancing.

The company has started engaging with banks to refinance its debt and more details are likely to be available later this year. There is risk that the post-refinancing bank debt amortisation, which could start as early as 2022, will not be met by the company's free cash flows despite minimal capex, as shipyard earnings could remain insignificant. We also see some risk of capex being higher than our assumption, if the company chooses to replace old ships at a faster pace to secure longer term time-charter contracts from key customer PT Pertamina (Persero) (BBB/Stable). Pertamina usually grants contracts of less than a year for ships aged around 20 years or more, compared with multi-year contracts for younger ships. These risks, if they materialise, could affect Soechi's credit profile.

Key Rating Drivers

Higher Shipping EBITDA, Lower Capex: Soechi's 9M19 EBITDA rose 20% yoy to USD56 million, helped by higher shipping revenue as a contract started in late 2018 for a floating storage and offloading (FSO) unit. Soechi's capex, excluding upfront docking charges, fell by 76% yoy to USD15 million. The company acquired one tanker in 2019, compared with two in 2018. Capex in 2018 also included charges for conversion of the FSO unit. We expect Soechi's EBITDA to remain at around current levels, assuming steady fleet capacity, sustained demand for its tanker fleet, and stable day-rates supported by the protected nature of the domestic shipping industry.

Strong Shipping Business Fundamentals: Soechi's fleet under time-charter contracts remained at a high 97% at end-September 2019 (year-earlier: 97%). The average duration of time-charter contracts for Soechi, weighted by capacity, was around 2 years, but contracts are often renewed. Soechi is the one of the largest independent tanker operators in a domestic shipping industry filled with many small players. Operators are protected from foreign competition by cabotage laws for domestic transport, which require the use of Indonesia-flagged vessels and limit foreign ownership to 49% in joint ventures.

Shipyard Remains a Drag: Soechi invested around USD200 million in its shipyard, which began operations in 2012. However, annualised 9M19 EBITDA from the shipyard remained quite weak at USD2 million. Soechi secured contracts in 2019 for building five ships, the first orders secured since 2015. However, the contract value was quite small at around USD7 million.

Two tankers ordered by Pertamina were completed in 4Q19, after delays in construction and inspections. As a result, revenue visibility for Soechi's shipbuilding business is poor. However, we have assumed further shipbuilding orders from 2020, likely to be granted by the government, and a gradual increase in ship-repair revenue. Nevertheless we don't expect shipyard EBITDA to meaningfully contribute to Soechi's cash flows in the medium-term.

Old Fleet, Small Size: The average age of Soechi's fleet (weighted by capacity) is around 20 years, against a typical useful ship-life of 30 years. This is in line with its strategy of operating older ships, which is the norm in Indonesia's market. The average age of Indonesian-flagged vessels is more than 20 years. However, older vessels usually earn shorter time-charter contracts than newer vessels, are more costly to maintain, have lower utilisation rates and are more prone to operational issues. Soechi's fleet of 39 ships as of September 2019 is also small relative to global peers.

Customer Concentration, but Low Risk: Pertamina is the company's largest customer and contributed 77% of Soechi's revenue in 9M19. This exposes Soechi to the risk of Pertamina not renewing contracts, not granting new contracts or defaulting on its payments. However, we believe these risks are significantly alleviated by the long relationship (Soechi's predecessor companies have been contracted by Pertamina since 1981), Pertamina's robust credit profile, as well as Soechi's strong market position and capex policy, which is tied to the likelihood of new contracts.

Some Deleveraging, Limited FCF: We estimate Soechi's FFO adjusted net leverage will fall further to 4.1x by 2021. Soechi should be able to reduce debt via limited free cash flow, as we assume controlled spending on ship acquisitions. Management has indicated a more conservative approach to fleet growth, compared with its earlier strategy of expanding rapidly to match rising tanker demand. However, we see risks to our capex assumptions from spending to replace ageing vessels, in addition to a more aggressive approach to growth.

Parent-Subsidiary Linkage Assessment: Fitch assesses overall linkages between Soechi and its parent PT Soechi Group (PT SG), which holds a 79.9% stake, to be weak and therefore assesses Soechi based on its standalone credit profile (including subsidiaries, but excluding the parent). We assess the parent, which has a much smaller shipping fleet and EBITDA than Soechi, to be weaker.

There are no guarantees from Soechi to PT SG or cross-default clauses covering debt at the parent. There are no loans to the parent, and dividends and related-party transactions are small. There are also some checks on related-party transactions under the local listing regulations and the US dollar bond indenture. Soechi's rating will likely be constrained to two notches above the consolidated credit profile including PT SG, as per Fitch's criteria. Therefore, Soechi's rating may be affected if PT SG's standalone credit profile deteriorates materially.

Derivation Summary

Soechi's rating can be compared with that on PT Buana Lintas Lautan Tbk (BULL, B+/Stable), which is a very close peer focusing on oil transportation in Indonesia. BULL had a fleet of 19 ships as of March 2019, with an average age (weighted by capacity) of around 18 years. BULL's fleet capacity under longer-term time-charter contracts was relatively high at over 90% as of end-March 2019 and Pertamina is the largest customer. While Soechi's fleet size is roughly double that of BULL, its FFO adjusted net leverage was considerably higher than BULL's 2.9x in 2018.

Soechi can also be compared with PAO Sovcomflot (BB+/Stable), whose standalone credit profile of 'bb' benefits from one-notch uplift due to strong support from the Russian government (BBB/Stable). The company engages in shipping of oil, oil products and gas and provision of offshore services. The company's fleet (owned and chartered) specialises in transportation in challenging icy conditions and includes 147 vessels with an average age of 9 years. Its customer base is diversified and consists of large international and Russian oil and gas companies. Sovcomflot's significantly stronger business profile justifies a higher rating, despite FFO adjusted net leverage being similar to Soechi's in 2018. (ends)