Fitch Rates Pertamina's proposed USD bonds 'BBB-(EXP)'

(Singapore, May 22, 2014 -- Fitch Ratings has assigned 'BBB-(EXP)' ratings to Indonesia-based PT Pertamina's US dollar notes to be issued under its global medium-term note (GMTN) programme. The GMTN programme, which is rated 'BBB-', has increased to USD10bn from USD5bn previously.

The proposed notes are rated at the same level as Pertamina's Issuer Default Rating of 'BBB-' as they constitute direct, unconditional and senior unsecured obligations of the company.

The proceeds from the bond issue are to be used for the state-owned oil and gas company's capex, acquisitions and general corporate purposes. Pertamina is expected to ramp up its capex significantly in the medium term to increase upstream production and refinery capacity and refinery operating flexibility.

Equalised with Sovereign: Pertamina's ratings are aligned with those of its parent, the Indonesian sovereign (BBB-/Stable), due to their strong operating and strategic linkages, as per Fitch's Parent and Subsidiary Linkage methodology. Pertamina is one of the most important state-linked entities in executing Indonesia's national energy policy and is the country's sole refiner and the dominant retailer of petroleum products.

Public Service Obligation: The company performs a public service obligation by selling certain refined products at below market prices, for which it is compensated through a government subsidy. Over 50% of Pertamina's sales volumes comprise of these subsidised products, and its EBITDA would be negative if not for this subsidy. The amount of the subsidy was around USD20bn in 2013 compared with EBITDA of USD6.1bn.

Fitch expects the total subsidy to fall in 2014 following the increase in prices of certain petroleum products in June 2013. However, Fitch expects Pertamina's role, including the provision of petroleum products at below market prices, to continue as further material price increases remain politically challenging.

Deteriorating Credit Metrics: Fitch expects Pertamina's credit metrics to continue to weaken as the company intends to materially increase its capex and investments in the medium term, which would lead to sustained negative free cash flow. Nevertheless, Fitch expects Pertamina's strong state linkages to help it maintain adequate liquidity via good access to bank financing and debt markets. Pertamina's funds from operations (FFO)-adjusted net leverage increased to 3.1x in FY13 (1.2x in FY12) and FFO interest coverage fell to 7x (14x in 2012).

Increasing Capex and Investments: Pertamina's capex and investment budget in FY14 to FY16 is over USD25bn, including an allocation of USD11bn for acquisitive spending. Fitch estimates that Pertamina externally sources over 75% of its refinery crude requirement and over 50% of refined products sold. Increasing Pertamina's upstream production and refinery capacity remains important to improving the company's profitability and as a result, in containing the state's subsidy expenses. In FY13, Pertamina incurred USD 4.1bn of capex and spent USD2.1bn on upstream acquisitions. (ends)