Moody's affirms Pelindo III's Baa3 ratings; stable outlook

(Singapore, June 23, 2020) -- Moody's Investors Service has affirmed the Baa3 issuer and senior unsecured ratings of Pelabuhan Indonesia III (Persero) (P.T.) (Pelindo III).

At the same time, Moody's has affirmed Pelindo III's Baseline Credit Assessment (BCA) of ba1.

The outlook on the ratings remains stable.

RATINGS RATIONALE

"The ratings affirmation reflects our expectation that Pelindo III's credit metrics will remain at a level that supports its Baa3 rating, notwithstanding the expected weakening in trade volumes at its ports due to the coronavirus outbreak," says Spencer Ng, a Moody's Vice President and Senior Analyst.

The port operator's issuer rating incorporates (1) its BCA of ba1, and (2) a one-notch uplift reflecting Moody's expectation of a high likelihood of support from the Government of Indonesia (Baa2 stable) in times of need. Moody's view on the high support takes into account the government's 100% ownership of the port operator and the importance of Pelindo III's ports to the maritime industry in the Central and East Java region.

The Government of Indonesia is becoming increasingly selective towards supporting the State Owned Enterprises (SOEs) given its current fiscal position. That said, the one-notch uplift to Pelindo III's rating remains appropriate, balancing the position of ports as key infrastructure assets with Pelindo III's comparatively lower strategic importance than other critical SOEs such as Perusahaan Listrik Negara (P.T.) (Baa2 stable).

The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented.

The port sector is affected by the shock, given its exposure to declining cargo volumes stemming from weakening global trading levels and softer macroeconomic conditions. Moody´s regards the coronavirus outbreak as a social risk under its environmental, social and governance (ESG) framework, given the substantial implications for public health and safety.

Pelindo III's standalone credit profile further considers (1) its strong market position in its catchment region, (2) the resilience of its container throughput, and (3) its strong financial profile and solid liquidity position leading up to the coronavirus outbreak.

However, the port operator's credit profile is constrained by its sizable expansion plans, which entail execution risks and a large funding requirement.

Moody's base case scenario assumes that trade volumes at Pelindo III's ports will decline in 2020, as a result of coronavirus-induced disruptions to global supply chains and reduced trade flow as governments impose preventative measures and economic conditions weaken. Around 85% of the company's revenue comes from cargo and vessel services, which are dependent on the number of ship calls and trade flow at its ports.

Under Moody's base case scenario, Pelindo III's financial leverage, as measured by funds from operations (FFO) to debt, will weaken to around 10% in 2020, compared to the minimum tolerance level set for its ba1 BCA of 6%-8%.

Despite expectation that trade volumes will recover in 2021, Pelindo III's financial leverage will likely remain at around 10% over the next three to four years, primarily because of the incremental debt the company will incur to partially fund its substantial capital expenditure program of around IDR4.5 trillion per annum over the next five years. The company has had a track record of underspending its budget in recent years; if this continues, it will result in stronger metrics relative to Moody's base case.

Pelindo III has sufficient liquidity -- including IDR4.3 trillion of cash on hand at the end of March and projected operating cash flow under Moody's base case -- to meet its debt repayments, planned capital expenditure and dividend payments over the next 12 months.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade Pelindo III's ratings if there is a sustained improvement in its BCA. Additionally, Moody's could raise the company's BCA if it maintains its solid financial profile — such that its FFO/debt remains above 10%-12% — after incorporating the additional debt necessary to fund its planned major capital spending program, and taking into account the proper management of execution risks associated with its capital spending.

However, Moody's could downgrade Pelindo III's ratings if the company's underlying credit quality deteriorates because of (1) an erosion of its dominant market share in its catchment area, with increased pressure on its profit margins because of rising competition, or (2) significant cost overruns on its capital spending program.

Specifically, Moody's could downgrade the company's BCA and ratings if its consolidated credit metrics weaken, such that its FFO/debt falls below 6%-8% or cash interest coverage falls below 1.50x-2.25x on a sustained basis.

Furthermore, a downgrade of Indonesia's sovereign rating to below Baa3, or a change in the government's shareholding level of Pelindo III as well as policies to support the port industry could prompt a review of the company's ratings.

Pelindo III is one of Indonesia's leading port operators, with 43 ports across Eastern and Central Java, including the country's second-largest and busiest container port, Tanjung Perak in Surabaya. The company is wholly owned by the Ministry of State Owned Enterprises and is regulated by the Ministry of Transportation. (ends)