Fitch Revises Outlook on Buana Lintas Lautan to Negative, Affirms 'B+'

(Fitch Ratings - Jakarta/Singapore - 20 Apr 2020)--Fitch Ratings has revised the Outlook on Indonesia-based tanker operator PT Buana Lintas Lautan Tbk (BULL) to Negative from Stable, while affirming the Long-Term Issuer Default Rating at 'B+'. Fitch Ratings Indonesia has affirmed the National Long-Term Rating at 'A-(idn)' while also revising the Outlook to Negative from Stable.

The Outlook revision reflects emerging risks to BULL's financial profile. BULL's FFO gross leverage increased to above 4x in 2019 (2018: 3.0x), which was higher than our expectations, and also above the threshold where Fitch would consider negative rating action. The elevated leverage also coincides with a higher mix of spot-rate contracts for the company's fleet, and sustained spending on fleet expansion could hamper deleveraging to a level consistent with the rating. We believe the risks of the coronavirus having a material impact on demand for BULL's ships are low as its fleet is mainly geared towards crude oil transportation and its largest customer is state-owned oil major, PT Pertamina (Persero) (BBB/Stable).

BULL has indicated a strategy of having at least 90% of revenue from time-charter contracts, which in our view, provide good cash flow visibility. However, we estimate that revenue linked to volatile spot rates are likely to increase from well below 10% in 2019 to above 15% in 2Q20 with the assignment of three recently acquired ships to a pool, before declining to just over 10% by 1Q21 based on an assumption of a moderation in rates. Spot rates are favourable currently, although they can be volatile and potentially have a significant financial impact.

BULL's rating incorporates a still-high share of time-charter contracts, an outlook for steady demand growth in the domestic market, which is protected from foreign competition by cabotage laws and a strong relationship with demand driver Pertamina, counterbalanced by a relatively small and old fleet.

'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

Spot Rate Exposure Increases: BULL had 24 of its 25 ships, or 93% of its fleet capacity, under standard time-charter contracts as of end-2019 while one tanker was part of a pool of ships managed by a pool operator and earned revenue based on spot rates. We estimate that the share of BULL's fleet capacity managed by the pool operator will increase to 14% by end-2Q20 with three out of 33 ships being part of the pool. BULL would also have two ships constituting 10% of its capacity under time-charter contracts with a base rate and upside if spot rates are higher. Thus, around 25% of BULL's fleet would have exposure to spot rates by end-2Q20.

Spot rates are more volatile and may decline even though they are currently significantly higher than BULL's time-charter rates. Time charters with rates linked to spot will allow BULL to take advantage of better spot rates and protect it from a sharp drop, but they lower its revenue visibility, in our view.

Risks from Rapid Fleet Growth: BULL's fleet has almost doubled from 17 ships as of end-2018. Of the 16 ships acquired since 2018, nine were purchased from the market while seven were part of a subsidiary acquisition, and we expect only six of them to have time charters from Pertamina by end-2Q20. We expect sustained fleet expansion over the next three-four years and we think rate volatility could lead to higher leverage in some years, though management has committed to maintaining gross debt to EBITDA below 3.5x. BULL may also need to seek new counterparties once existing contracts end if its fleet grows faster than Pertamina's stable demand and a higher share of its fleet is chartered by third parties.

Revenue Stability Offsets Concentration Risks: Pertamina, as BULL's largest customer, contributed around 60% of the company's 2019 revenue directly after excluding BULL's floating production storage and offloading vessel employed by a joint operation involving Pertamina. This 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 negated by the stable demand growth outlook for oil and its transportation in Indonesia, BULL's long-standing relationship with Pertamina, Pertamina's robust credit profile and BULL's healthy operating history. Therefore, we expect most of BULL's time-charter contracts with Pertamina to be extended upon their expiry and day rates will be largely stable.

Old Fleet, Small Size: We estimate the average age of BULL's fleet, weighted by capacity, will be around 17 years as of end-June 2020, against a typical useful ship life of 25-30 years. The company's fleet-age profile corresponds with its strategy of operating older ships, the norm in Indonesia's market. The average age of Indonesian-flagged vessels is more than 20 years. However, older vessels usually earn shorter time-charter contracts than newer vessels, are more costly to maintain, have lower utilisation rates and are more prone to operational issues. BULL's fleet of 33 ships is also small relative to global peers.

Some Deleveraging, Negative FCF: We estimate FFO gross leverage will moderate to 2.9x in 2020, from 4.3x in 2019, driven by a jump in EBITDA due to higher fleet capacity and relatively high spot rates. Thereafter, we forecast leverage to increase to 3.8x in 2021 due to lower EBITDA based on an assumption that spot rates will moderate but BULL acquires another five ships for USD100 million. We also estimate that robust operating cash flows will be offset by spending on vessel purchases, resulting in negative free cash f low (FCF). The company says it intends to reduce capex should rates decline. We have not assumed any equity inflows in our forecasts after rights issues in 2017-2019.

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 39 ships as of September 2019, with an average age, weighted by capacity, of around 20 years. Soechi's fleet under time-charter contracts was high at 97% at end-September 2019 and Pertamina is also the largest customer. Soechi's fleet size is larger than BULL's, but the average age is slightly higher. We expect Soechi's FFO gross leverage to remain higher than BULL's at around 4.5x on average over 2019-2021, signifying a weaker financial profile.

BULL can also be compared with PAO Sovcomflot (BB+/Stable), whose Standalone Credit Profile of 'bb' benefits from a one-notch uplift due to strong support from the Russian government (BBB/Stable). The company engages in shipping of oil, oil products and gas and provision of offshore services. The company's fleet, owned and chartered, specialises in transportation in challenging icy conditions and includes 147 vessels with an average age of around nine years. Its customer base is diversified and consists of large international and Russian oil and gas companies. Sovcomflot's significantly stronger business profile justifies a higher rating, despite FFO gross leverage being higher than that of BULL in 2018.

BULL's national rating can be compared with that of PT Aneka Gas Industri Tbk (A-(idn)/Stable). Aneka Gas is the largest industrial gas manufacturer in Indonesia, accounting for around a third of the country's consumption. Around 70% of Aneka Gas' revenue is derived via long-term supply contracts, which typically span five to 15 years, and allow for adjustments when input costs change. Its EBITDA margin has been stable at around 30%. However, its FFO gross leverage is estimated by Fitch to be higher than BULL's at around 4.5x on average over 2019-2021. Aneka Gas' better business profile due to longer term contracts is offset by higher leverage, in our view. Therefore, we have rated both BULL and Aneka Gas at the same level. (ends)