Fitch Downgrades Buana Lintas Lautan to 'B', Places on Rating Watch Negative

(Fitch Ratings - Jakarta - 14 Apr 2021)--Fitch Ratings has downgraded Indonesia-based tanker operator PT Buana Lintas Lautan Tbk's (BULL) Long-Term Issuer Default Rating to 'B', from 'B+'. Fitch Ratings Indonesia has downgraded the National Long-Term Rating to 'BBB+(idn)', from 'A-(idn)'. The ratings have also been placed on Rating Watch Negative (RWN).

The RWN reflects risks that BULL may struggle to meet its substantial long-term debt maturities in 2021 in the absence of prompt refinancing or equity raising. Additional debt raised in 2021 may also present liquidity risks in subsequent years.

BULL is working to refinance a portion of its debt and raise additional debt against working capital and through other means to boost liquidity. The company may also raise further equity in 2021. The latest appraisal value of BULL's shipping fleet of over USD600 million and its record of equity inflows in the last four years suggest that the company should succeed in its efforts. However, these efforts are subject to risks from adverse market conditions, and a further rating downgrade is likely if BULL is unable to raise adequate funding within the next few months.

The rating action also factors in higher business risk due to increased exposure to the international market where there is much more competition and higher rate volatility than within Indonesia. This also indicates a shift in management's strategy. However, BULL is looking to mitigate volatility by seeking time charter contracts.

'BBB' National Ratings denote a moderate level of default risk relative to other issuers or obligations in the same country or monetary union.

KEY RATING DRIVERS

Sharp Rise in Debt: We estimate that BULL's debt has more than tripled since end-2018, driven by vessel acquisitions, to around USD400 million by end-2020, including USD170 million added in 2020. As a result, debt due in 2021 is significantly more than in 2020, and we estimate that the company's free cash flow will be insufficient to address it.

Risks from Rapid Fleet Growth: BULL acquired 13 ships in 2020, increasing fleet capacity by 91%, but placed only one ship with PT Pertamina (Persero) (BBB/Stable), the national oil company and main domestic driver of demand for BULL. The rest were chartered by customers such as Maersk, Trafigura and Shell and are in international waters. The average duration of BULL's time-charter contracts is short at around two years and the risk of contract non-renewal by international customers is higher than Pertamina as BULL enjoys protection from foreign competition in Indonesia due to cabotage laws.

The fleet growth beyond Pertamina's demand has lowered BULL's revenue visibility. It also makes the company prone to weaker capex discipline, in our view. Larger international exposure is also a shift from management's previous strategy to limit fleet capacity in the international market to 10% and focus on demand from Pertamina.

Increased Spot Rate Exposure: BULL's share of fleet capacity under standard time-charter contracts fell to 51% by end-2020, from 93% at end-2019. Of the remaining capacity at end-2020, 18% was part of a pool of ships managed by a pool operator and earned revenue based on spot rates, while 27% was under time-charter contracts with a base rate and upside if spot rates are higher. Thus, around 45% of BULL's fleet was exposed to spot rates by end-2020.

Spot tanker rates are volatile and pool rates declined by over 70% during 2020 for BULL as weaker global oil demand and supply due to the impact of Covid-19 hit trade flows. Rates picked up in 1Q21, but sustained cuts to global oil supply by OPEC are risks. Time charters linked to spot rates will allow BULL to take advantage of rate increases and protect it from a sharp drop, but they reduce its revenue visibility, in our view. For BULL's forecast, we assume spot rates to rise to around the 10-year average by 4Q21 and remain steady thereafter. We also adjust rates to account for the company's old fleet.

Old Fleet, Small Size: We estimate the average age of BULL's fleet, weighted by capacity, at around 17 years, against a typical useful ship life of 25-30 years. The company's fleet age is in line with its strategy to operate older ships, the norm in Indonesia. The average age of Indonesian-flagged vessels is more than 20 years. However, older vessels usually earn shorter time-charter contracts than newer ones, are costlier to maintain, have lower efficiency and have more operational issues. BULL's 38 ships at end-2020 is fewer than global peers', but we expect the fleet to increase over the next three years.

Lower Reliance on Pertamina: Pertamina is BULL's largest customer and accounted for over 60% of BULL's 9M20 revenue. We expect this share to fall to below 50% in 2021 and possibly decline further in the next few years. The risks related to the reliance on Pertamina are offset by the stable demand growth outlook for oil and its transportation in Indonesia, and Pertamina's robust credit profile. We expect most of BULL's time-charter contracts with Pertamina to be extended upon expiry and day rates to be stable.

Further Acquisitions May Delay Deleveraging: We estimate BULL's FFO adjusted gross leverage at 3.5x at end-2020, higher than our previous forecast of around 3.0x due to a larger-than-expected spending to acquire ships and negative free cash flow. Recent weakness in spot rates is likely to affect BULL's EBITDA in 2021 and we estimate leverage to rise to 4.0x. Thereafter, we expect better rates and a larger fleet to reduce leverage gradually to 3.5x by 2023, despite assuming sustained vessel acquisitions. Deleveraging may be delayed if BULL's fleet increases faster than our assumption.

ESG - Management Strategy: BULL has an ESG Relevance Score of '4' for Management Strategy. The large upcoming debt maturities and management's inability to address it sufficiently in advance has raised liquidity risks significantly for BULL. Improved visibility on the company's ability to meet its debt obligations in 2021 and beyond could lead Fitch to revise the score to '3'.

DERIVATION SUMMARY

BULL's rating can be compared with that of PT Soechi Lines Tbk (B/Stable), which is a very close peer focusing on oil transportation in Indonesia. Soechi had a fleet of 31 ships at end-September 2020, with an average age, weighted by capacity, of around 20 years. Soechi's fleet under time-charter contracts was high at 98% at end-September 2020 and Pertamina is also the largest customer, contributing 71% of 9M20 revenue.

Soechi's fleet has an older average age and smaller size than BULL's. We also expect Soechi's FFO adjusted gross leverage to remain higher. However, these are offset by higher revenue stability for Soechi as the company is focused on standard time-charter contracts within Indonesia and demand from Pertamina is likely to remain the main driver of fleet growth. Soechi's Stable Outlook also incorporates a lower liquidity risk than BULL, in addition to our expectations for a steady operating and financial profile.

BULL can also be compared with PAO Sovcomflot (BBB-/Stable), whose Standalone Credit Profile of 'bb+' benefits from a one-notch uplift reflecting the links to the parent, the Russian sovereign (BBB/Stable). Sovcomflot is one of Russia's largest shipping companies and a global leader in maritime transportation of hydrocarbons. Its business profile benefits from servicing a diversified customer base of large international and Russian oil and gas companies.

Sovcomflot EBITDAR in 2020 was more than 7x that of our estimate for BULL and its fleet is also fairly young with an average age of 11.6 years. Sovcomflot has expanded from being a pure tanker business into the industrial segment (LNG/LPG carrier and offshore services), which accounted for just over half of time charter equivalent revenue in 2020. The company aims to increase this to 70% by 2025. This segment remains more profitable and benefits from long-term, fixed-rate contracts. Sovcomflot's significantly stronger business profile than BULL's justifies a higher rating.

BULL's National rating can be compared with that of PT Bali Towerindo Sentra Tbk (Bali Tower, BBB+(idn)/Positive), a telecommunication tower and fibre optic provider. Bali Tower's smaller EBITDA size compared with BULL is offset by higher revenue stability because of solid telco demand for towers and increasing data usage from residential and corporate segments. We expect Bali Tower's FFO adjusted gross leverage to be similar to BULL's at around 4.0x in 2021 and 2022.

KEY ASSUMPTIONS

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

- Deadweight tonnage capacity to increase at a CAGR of 27% over 2020-2023.

- Standard time-charter rates to stay flat, while spot rates to improve to around the long-term average by 4Q21.

- Average annual capex, including upfront docking charges, of around USD110 million over 2021-2023.

- Direct costs for vessel operations, excluding port charges and bunker fuel, to decline by 2% per year after adjusting for an increase in fleet capacity due to efficiency gains.

- Administrative expenses to increase by 7% per year.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Fitch will resolve the RWN upon further clarity on BULL's ability to meet its debt maturities.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Lack of visibility regarding BULL's ability to meet its debt maturities in 2021 with the help of refinancing and equity issuance, and the company's ability to repay obligations after 2021 from free cash flow excluding discretionary vessel acquisitions.

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

Liquidity Risk from Large Maturities: BULL had readily available cash of USD13 million as of end-3Q20, compared with current maturities of long-term loans and finance leases of USD81 million and a short-term loan of USD9 million. BULL also had USD24 million invested in a fund named Suisse Charter Investment Ltd., which Fitch does not include as readily available cash. BULL had total debt of USD354 million consisting of secured bank loans and finance leases.

We think BULL is likely to struggle to meet its large long-term debt maturities in 2021 using its free cash flow, even if we exclude spending on vessel acquisitions. Therefore, the company is highly reliant on refinancing and other means such as equity inflows to boost its liquidity. While the latest appraisal value of BULL's ships appears adequate and should aid its refinancing efforts, the short time-frame available to the company presents risks from adverse market events. The latest appraised value of 38 ships is around USD630 million, according to BULL, and a loan-to-value ratio of 75% justifies secured loans of around USD470 million.

SUMMARY OF FINANCIAL ADJUSTMENTS

Key financial adjustments include:

- Unamortised transaction costs (2019: USD1.2 million) have been added back to debt.

- Advances to ship manager, prepaid insurance and accrued expenses for vessel operations and docking have been included under working capital.

- Income-tax expense in income statement and tax paid in cash flow statement have been increased to reflect applicable tax on shipping revenues in Indonesia. Corresponding offsetting adjustments have been made to operating expense items.

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

BULL has an ESG Relevance Score of '4' for Management Strategy. Management's inability to address upcoming debt maturities sufficiently in advance indicates some weakness in the execution of the refinancing plan. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

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)