Fitch Affirms Soechi Lines at 'B'; Withdraws Ratings

(Fitch Ratings - Jakarta/Singapore - 06 Oct 2021)-- Fitch Ratings has affirmed Indonesia-based tanker operator PT Soechi Lines Tbk's (Soechi) Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. The rating on the 8.375% US dollar senior unsecured notes due 2023 has been affirmed at 'B-' with a Recovery Rating of 'RR5'. The notes were issued by Soechi's wholly owned subsidiary, Soechi Capital Pte. Ltd., and guaranteed by Soechi and all its operating subsidiaries. Fitch has simultaneously withdrawn the IDR and the rating on the notes.

Soechi's rating is underpinned by its position as a major tanker operator in the domestic market, which has protection from foreign competition, and revenue visibility due to steady demand from its key customer, PT Pertamina (Persero) (BBB/Stable). These strengths are significantly offset by the old age and small size of its fleet, and sustained EBITDA losses at its shipyard.

Soechi's EBITDA was weaker than our expectations in 2020 due mainly to a large loss at its shipyard and its funds from operations (FFO) adjusted net leverage ratio was higher-than-expected at 5.0x. Soechi has managed to reduce costs and we estimate its leverage will decline and remain at around 4.0x over the next three years, despite a pick-up in capex. The company needs to address the maturity of its US dollar bonds in early 2023; however, we expect Soechi to tap into its existing banking relationships to secure additional funding for bond repayment and finalise plans within the next six months.

Fitch has chosen to withdraw the ratings for commercial reasons.

Key Rating Drivers

Strong Shipping Business Fundamentals: Soechi's fleet capacity under time-charter contracts was sustained at a high level of 98% at end-June 2021 (end-June 2020: 98%). The average duration of the time-charter contracts, weighted by capacity, was less than two years, but contracts are often renewed.

Soechi is the one of the largest independent tanker operators in a fragmented domestic shipping industry with many small players. Industry participants have protection from foreign competition through cabotage laws for domestic transportation - which mandate the use of Indonesia-flagged vessels and limit foreign ownership to 49% in joint ventures. Domestic tanker demand is likely to continue growing over the longer term, driven by increasing fuel consumption. These market characteristics also result in relatively stable day-rates.

Shipyard Remains a Drag: Soechi's shipyard, which has struggled to earn new shipbuilding and ship-repair contracts, saw its revenue drop sharply and the EBITDA loss, as per our estimates, widen sharply to around USD14 million in 2020 (2019: USD2 million). The company has managed to cut costs based on 1H21 financials, but we expect EBITDA losses at the shipyard to be sustained over the next three years due to limited revenue. Soechi expects to deliver an under-construction ship in 4Q21 and has no more shipbuilding orders. However, we have assumed Soechi will continue to earn flat revenues from 2022 with the help of further contracts, potentially from the government.

Old Fleet, Small Size: The average age of Soechi's fleet (weighted by capacity) is 21 years, against a typical useful ship life of 30 years. The company's fleet age matches its strategy of operating older ships, which is the norm in Indonesia's market. However, older vessels usually earn shorter time-charter contracts than more recently constructed vessels. In addition, they are generally costlier to maintain and are subject to lower utilisation rates due to more maintenance required and more operational issues. Soechi's fleet of 30 ships as of June 2021 is also small relative to global peers.

Customer Concentration, but Low Risk: Pertamina and its shipping subsidiary are Soechi's largest customers, accounting for 77% of revenue in 1H21. This exposes Soechi to the risk of Pertamina not renewing or granting contracts, or defaulting on payments. However, we believe these risks are alleviated significantly by Soechi's long-standing relationship with Pertamina (Soechi's predecessor companies have been contracted by Pertamina since 1981), Pertamina's investment-grade credit profile, and Soechi's strong market position and capex policy, which is tied to the likelihood of new contracts.

Higher Capex Likely: Soechi has not acquired any vessels since 2020, focusing instead on using free cash flow (FCF) to increase its cash balance and cut net debt. The buyback of the US dollar notes at a discount has also allowed the company to reduce outstanding debt. However, we expect Soechi to resume fleet growth from 2022 after four years of capacity contraction, which is likely to result in negative FCF and push its FFO adjusted net leverage ratio to above 4.0x by 2023, from 3.5x in 2021.

Parent-Subsidiary Linkage Assessment: Fitch assesses overall linkages between Soechi and the parent, PT Soechi Group (PT SG), which holds a 79.9% stake, as weak based on weak legal and moderate operational ties. We therefore assess Soechi based on its Standalone Credit Profile (SCP). We assess the parent, which has a much smaller shipping fleet and EBITDA than Soechi, to have a weaker credit profile. 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 relatively small. There are also some checks on related-party transactions under the local listing regulations and the US dollar bond indenture.

Potential Rating Constraint: Soechi's rating may be affected if PT SG's SCP deteriorates significantly, as Soechi's rating will be constrained to two notches above the consolidated credit profile, including PT SG, as per Fitch's criteria.

Derivation Summary

Soechi's rating can be compared with that of Russia-based PAO Sovcomflot (SCF, BBB-/Stable), whose rating benefits from a one-notch uplift from its SCP of 'bb+' due to links to the parent, Russia (BBB/Stable). SCF is one of Russia's largest shipping companies and a global leader in maritime transportation of hydrocarbons.

SCF's business profile benefits from servicing a diversified customer base of large international and Russian oil and gas companies. SCF's EBITDAR in 2020 was more than 15x that of Soechi's and its fleet is also fairly young with an average age of 12 years. SCF has a significantly stronger business profile than Soechi and its leverage and coverage metrics in 2020 were better. This justifies SCF's higher rating.

Key Assumptions

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

- Soechi's deadweight tonnage to increase at a CAGR of 3% over 2021-2024;

- Tanker day-rates to stay flat over 2021-2024;

- Average EBITDA margin for shipping segment of 48% over 2021-2024 (2020: 54%);

- EBITDA loss at shipyard of USD5 million in 2021, narrowing to USD3 million by 2023;

- Average annual capex, including upfront docking charges, of USD45 million in 2021-2024 (2020: USD8 million).

The recovery analysis assumes that Soechi would be liquidated in case of bankruptcy. We have also assumed a 10% administration claim.

Liquidation Approach

- Our liquidation value of around USD250 million lower than our previous assessment of around USD275 million and includes our estimate of recoveries from Soechi's current assets related to working capital and fixed assets related to the shipyard, in addition to its shipping fleet. We have valued the shipping fleet based on an extrapolation of Soechi's latest sale of its 105,000 DWT tanker for USD8 million in 2Q21. Most of the remaining value is attributable to the land for Soechi's shipyard.

- Soechi had secured bank loans of USD210 million as of 30 June 2021. It also had USD57 million of US dollar senior unsecured notes outstanding.

- The debt waterfall results in a recovery of 25% for the note holders, corresponding to a Recovery Rating of 'RR5'. Therefore, the US dollar notes have been notched down by one notch from Soechi's IDR.

RATING SENSITIVITIES

No longer relevant, as the ratings have 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 Liquidity, Some Risk: Soechi had total debt of USD267 million as of end-June 2021, compared with cash (included cash reported as restricted) of USD58 million. Of the total debt, USD31 million is due in 2022 and USD90 million, including USD57 million of US dollar notes outstanding, is due in 2023.

Soechi is working to secure additional financing from banks to repay its outstanding bonds and we expect the company to successfully conclude negotiations with banks within the next six months, helped by its existing relationships and operating profile. We think the company should be able to address its remaining debt maturities over the next three years, by forgoing discretionary capex in case it is unable to secure new loans, unless the debt assumed for refinancing the US dollar notes has a steep amortisation schedule.

Issuer Profile

Soechi is a major private tanker owner and operator in Indonesia, with a fleet of 30 ships as of end-June 2021.

Summary of Financial Adjustments

Material non-standard financial statement adjustments include:

- Cash kept as collateral for loan facilities and for US dollar bonds' interest reserve account, but reported as "restricted", has been classified as readily available as it is usable for debt servicing (2020: USD12.7 million);

- Docking expenses, which are amortised after incurrence, have been added back to EBITDA (2020: USD5.6 million). Cash expense for docking has been deducted from capex and added to operating cash flow (2020: USD5.6 million);

- "Unbilled revenues" and "estimated earnings in excess of billings on contracts" have been included in working capital because of their conceptual similarity to trade receivables. Advances and prepaid expenses have also been included in working capital. However, financing and tax-related accrued expenses have been excluded from working capital;

- Unamortised debt transaction costs have been added back to debt (2020: USD3.2 million).

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

Soechi has an ESG Relevance Score of '4' for Management Strategy. The company made a large investment in its shipyard business but earnings generation has been significantly weaker than Fitch's and management's expectations. This indicates some weakness in management strategy development and implementation, which has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors. Further aggressive growth spending remains a risk to Soechi's credit profile.

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)