Fitch Publishes Buana Lintas Lautan's 'A-(idn)' National Rating; Outlook Stable

(Fitch Ratings-Jakarta-18 September 2019)--Fitch Ratings Indonesia has published PT Buana Lintas Lautan Tbk's (BULL; B+/Stable) National Long-Term Rating of 'A-(idn)'. The Outlook is Stable. The rating reflects the company's solid position in Indonesia's shipping industry, supported by the country's cabotage law, its strong relationship with its customer, national oil company PT Pertamina (Persero) (BBB/Stable), and a large share of time-charter contracts. We estimate 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.

'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category.

KEY RATING DRIVERS

Revenue Visibility from Chartered Contracts: BULL earned 75% of its 1Q19 revenue from time-charter contracts, which are for a longer term than spot charters, improving revenue visibility. The share rose to 80% in 2Q19 with additional time-charter contracts signed. BULL subsequently signed two new time-charter contracts in July 2019 and expects revenue from time-charter contracts to reach at least 90% by end-2019. Around 86% of its fleet capacity, or 18 out of BULL's 21 vessels, were under time-charter contracts as of end-July 2019.

Strong Business Position: BULL improved its share of Aframax tankers hired by Pertamina by 42 percentage points (pp) over 2014-2019, while the share of medium-range tankers rose by 11pp, according to company data. Demand growth has been supported by Indonesia's expanding economy, which we believe is likely to be sustained. The domestic tanker industry also enjoys relatively stable day rates due to the fragmented industry landscape with a large number of small players and protection from international players through the cabotage law, which mandates the use of Indonesia-flagged vessels and Indonesian citizens for domestic sea transportation.

Customer Concentration but Low Risk: Pertamina is BULL's largest customer, contributing around 56% of its 1Q19 revenue, excluding the floating production storage and offloading unit employed by a joint operation involving Pertamina. This was an increase from the 40% share at end-December 2018 after its blacklisting by Pertamina for administrative reasons was resolved in 2018. BULL renewed all time-charter contracts with Pertamina when the blacklisting was resolved. Pertamina's revenue contribution, including the floating production storage and offloading unit under its joint operating entity, was 72%, an increase from 58% at end-2018.

The majority share of revenue from Pertamina exposes BULL to the risk of Pertamina not renewing its contracts, not granting new contracts or defaulting on its payments. However, we believe these risks are significantly alleviated by BULL's longstanding relationship with Pertamina (BULL and its predecessor companies have engaged with Pertamina for around four decades), Pertamina's robust credit profile and BULL's healthy operating history.

Old and Small Fleet: The average age of BULL's fleet (weighted by capacity) is around 18 years, 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.

Rapid Growth Likely to Continue:  BULL's fleet size rose to 21 by end-July 2019, from 10 in 2015, an almost 200% jump in tonnage capacity. Vessel growth paused in 2018 in the wake of the blacklisting but we expect fleet size to increase rapidly over the next three years. We think the risk from a faster-than expected growth in fleet, which may impact credit metrics, is mitigated by the company's commitment to maintain 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 maintain our estimate that BULL's FFO adjusted gross leverage will rise to around 4x in 2019, from around 3x in 2018, driven by a large investment in fleet growth. Thereafter, we estimate leverage to moderate to around 3.0x in 2020. 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. We expect FFO fixed-charge coverage to remain relatively healthy at above 3x; however, a significant rise in interest costs due to further loan refinancing could result in a weaker coverage ratio than expected.

DERIVATION SUMMARY

BULL's National Long-Term Rating can be compared with that of PT Aneka Gas Industri Tbk (A-(idn)/Stable) and PT Geo Dipa Energi (Persero) (A(idn)/Stable; Standalone Credit Profile: a-(idn)).

Aneka Gas is Indonesia's leading industrial-gas distributor. The business benefits from long-term contracts of between five and 15 years with a cost pass-through mechanism giving revenue visibility as well as margin stability. Its EBITDAR margin has been stable at around 30% and we expect Aneka Gas to maintain a robust margin. However, aggressive capex and investment activities have inflated its leverage position. We expect FFO adjusted net leverage to remain above 4.0x and FFO fixed-charge cover to remain around 2.0x in the next two-three years. We think Aneka Gas' weaker leverage and coverage metrics due to its aggressive capex activities counterbalance its better revenue visibility than that of BULL. This also justifies rating BULL at the same level as Aneka Gas.

Geo Dipa is a geothermal energy company that engages in the exploration and exploitation of geothermal sources, as well as distribution in the form of electrical energy. The business has strong cash flow visibility from a long-term contract with state electricity company and monopoly PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable) until 2053. Geo Dipa also maintains an EBITDAR margin above 50% due to a favourable pricing arrangement with PLN. BULL does not have the same level of revenue visibility as Geo Dipa; however, a favourable sector outlook, its long-term partnership and growing importance to Pertamina improve its business profile. Geo Dipa also has a longer project lead time, which prolongs deleveraging. We have therefore rated BULL at the same level as Geo Dipa's Standalone Credit Profile.

KEY ASSUMPTIONS

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

- Deadweight tonnage capacity to increase at a CAGR of 33% over 2019-2021

- Tanker day rates to stay broadly flat

- Average annual capex, including upfront docking charges, of around USD90 million over 2019-2021

- Direct costs for vessel operations excluding port charges and bunker fuel to rise by 2% per annum

- Administrative expenses to increase by 7% per annum from 2019

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- Increase in scale with fleet size close to 50 ships or more, while maintaining a healthy financial profile such that FFO adjusted gross leverage is close to 3x or lower

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- FFO adjusted gross leverage above 4x (2018: 2.9x) on a sustained basis;

- FFO fixed-charge cover below 3x (2018: 4.6x) on a sustained basis;

- Evidence of shift in focus on time-charter contracts or substantial deterioration of the operating environment

LIQUIDITY

Manageable Liquidity: BULL had readily available cash of around USD2 million as of end-1Q19, compared with current maturities of long-term loans of USD43 million and short-term loans of USD2 million. BULL's total debt of around USD119 million consisted of secured bank loans. BULL's fleet expansion plans should result in significant negative FCF in 2019-2020. However, we think the liquidity risks from its significant debt maturities and negative FCF are manageable.

The company received around USD42 million in July 2019 from a rights issue and refinanced USD13 million of debt due in 2Q19 for USD24 million. Further refinancing and additional debt for vessel purchases should support BULL's liquidity. BULL's refinancing capability is underpinned by its robust relationships with several domestic banks along with the fleet's revenue visibility and appraisal value. Vessel purchases may also be financed with a loan-to-value ratio of 70% or higher, freeing up a portion of operating cash flows for debt servicing. (ends)