Fitch Assigns Buana Lintas Lautan First-Time 'B+' IDR, Rates USD Bonds

(Fitch Ratings - Jakarta/Singapore - 13 May 2019)-- Fitch Ratings has assigned Indonesia's PT Buana Lintas Lautan Tbk (BULL) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. Fitch has also assigned a 'B+(EXP)' expected rating with a Recovery Rating of 'RR4' to the proposed US dollar senior unsecured notes to be issued by BULL's wholly owned subsidiary, BULL Maritime Capital Pte. Ltd.

BULL was established in 2005 as a domestic shipping subsidiary of PT Berlian Laju Tanker Tbk (BLTA), which faced financial difficulties in 2012. BLTA's stake in BULL subsequently dropped to zero by 2014 and it no longer exerts any management control over BULL, which is now majority owned by the Danatama Group. BULL focuses on transportation of oil, gas and related products in Indonesia, primarily for PT Pertamina (Persero) (Pertamina, BBB/Stable), and estimates that it has a 26% share of the vessels contracted by Pertamina in the 30,000-110,000 deadweight tonnage category consisting of Medium Range (MR) and Aframax tankers.

The rating is underpinned by a robust position in an industry protected from foreign competition by cabotage laws, a strong relationship with demand driver Pertamina and a high share of time-charter contracts. However, the rating is weighed down by a relatively small and old fleet. We estimate BULL will maintain a moderate leverage profile over the next three years, with FFO adjusted gross leverage below 4x, after factoring in significant investments for fleet growth over the period.

The proposed notes will be guaranteed by BULL and its operating subsidiaries representing more than 90% of consolidated EBITDA. The proceeds are intended to be used mainly for refinancing BULL's existing debt and funding additional capex. The final rating is subject to the receipt of final documentation conforming to information already received.

Key Rating Drivers

Strong Business Position and Outlook: The share of Aframax tankers hired by Pertamina from BULL increased by 42pp over 2014-2019, while the share of MRs rose by 11pp, according to company data. We believe demand growth for oil and gas transportation in Indonesia is likely to be sustained, helped by a growing economy. We also think BULL's business prospects are unharmed by the blacklisting by Pertamina for several months in 2018, which was due to administrative reasons.

Day rates for the domestic-tanker industry, which is fragmented with a large number of small players, have also been relatively stable, supported by demand growth and protection from competition from international players. The cabotage law mandates the use of Indonesia-flagged vessels and Indonesian citizens for domestic sea transportation. Foreign ownership in local shipping companies is also restricted to 49%, which has discouraged international operators.

Customer Concentration, But Low Risk: Pertamina is BULL's largest customer, contributing around 60% of the company's 2016-2017 revenue directly after excluding BULL's floating production storage and offloading vessel employed by a joint operation involving Pertamina. The share of revenue dropped to 40% in 2018 as a result of the blacklisting, but we expect Pertamina's contribution to pick up from 2019. A majority of the revenue from Pertamina exposes BULL to the risk of the national oil company not renewing contracts, not granting new contracts or defaulting on its payments. However, we believe these risks are significantly alleviated by BULL's long-standing relationship with Pertamina as the company and its predecessor have engaged with Pertamina for around four decades, Pertamina's robust credit profile and BULL's healthy operating history.

Contracts Lend Revenue Visibility: BULL earned 94% of its 2017 revenue from time-charter contracts, which are for a longer term than spot charters and improve revenue visibility. The portion of revenue from time charters dropped to 62% in 2018, hit by the blacklisting. However, we expect the share of time-charter-based revenue to return to above 90% from 2019. As of end-March 2019, 16 out of BULL's 19 vessels, or over 90% of fleet capacity, were under time-charter contracts. BULL was able to mitigate the hit to its time-charter revenue from Pertamina in 2018 by securing spot charters with Petroliam Nasional Berhad (PETRONAS) (A-/Stable), ExxonMobil and Vitol, which helped the company post 31% revenue growth.

Old Fleet, Small Size: The average age of BULL's fleet (weighted by capacity) was around 18 years as of end-March 2019, against a typical maximum useful ship life of 30 years. The company's fleet-age profile corresponds 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. Older vessels are generally more costly to maintain than more recently constructed vessels, subject to lower utilisation rates due to their increased maintenance requirements and more prone to operational issues. BULL's fleet of 19 ships as of March 2019 is also very small relative to global peers.

Rapid Growth to Continue: BULL's fleet size rose to 17 by 2017, from 10 in 2015, resulting in a 120% jump in tonnage capacity. We expect its fleet size to increase rapidly over the next three years after the pause in 2018 in the wake of the blacklisting. BULL intends to focus on oil transportation over the next few years, but it may explore opportunities for transporting commodities such as coal at a later stage. We think that risks from a faster-than-expected growth in its fleet, which may impact credit metrics, and possible diversification into the transportation of other commodities are mitigated by management's commitment to maintaining a gross debt to EBITDA ratio below 3.5x, linking capex to the likelihood of new contracts and having at least 90% of revenue from time-charter contracts.

Moderate Leverage, Negative FCF: We estimate FFO adjusted gross leverage will increase to around 4x in 2019, from around 3x in 2018, driven by investment in fleet growth. Thereafter, we estimate leverage to moderate to around 3.5x in 2020-2021. We also estimate free cash flow (FCF) to be negative over the next three years. Rising operating cash flows, driven by increasing fleet capacity, are likely to be offset by spending on vessel purchases. However, its FFO fixed-charge coverage should remain relatively healthy at above 3x. We have not assumed any equity inflows in our forecasts, following rights issues in 2017 and 2018. (ends)