Moody's assigns first-time Baa3 issuer rating to Pertamina International Shipping (P.T.); outlook stable

(Singapore, November 30, 2023) -- Moody's Investors Service (Moody's) has assigned a first-time issuer rating of Baa3 to Pertamina International Shipping (P.T.) (PIS). The rating outlook is stable.

"PIS' Baa3 long-term issuer rating reflects its strategic role as the integrated marine logistics provider in the oil and gas value chain of Indonesia's national oil company Pertamina (Persero) (P.T.) (Baa2 stable), effectively working as a virtual pipeline provider transporting liquids across the many islands of Indonesia," says Maisam Hasnain, a Moody's Vice President and Senior Analyst.

The rating also reflects PIS' high degree of cash flow stability and visibility, underpinned by its long-term captive businesses with companies within the Pertamina group.

The Baa3 rating incorporates two notches of uplift stemming from the likelihood of extraordinary support from Pertamina because PIS is strategically important as the key shipping services provider for the group.

"At the same time, the rating remains constrained by the company's substantial capital spending plans, which will weaken credit metrics; its small scale and aged fleet; and short operating track record. Because of its small fleet, PIS has a high dependence on leased vessels from domestic shipowners," says Hasnain, who is also Moody's lead analyst for PIS.

RATINGS RATIONALE

As of 30 June 2023, PIS operates around 300 vessels, of which 97 are its own fleet and the remaining vessels are chartered from other domestic shipowners. Pertamina's internal policies require its subsidiaries to utilize PIS as the shipping provider.

PIS is a strategically important subsidiary of Pertamina as it is the group's key shipping provider for all of its domestic shipping requirements in the downstream business. Because of Indonesia's geographic structure as an archipelago with more than 18,000 islands, PIS serves as the virtual pipeline to transport crude oil and its derivative products across 100 terminals from one island to another.

There are significant barriers to entry for other shipping companies because of Indonesia's cabotage laws and the Pertamina group's requirements for its subsidiaries to engage PIS as the shipping provider. This has enabled PIS to have a dominant position within the Pertamina group in Indonesian waters.

PIS also benefits from a high degree of cash flow stability given that its contracts with the Pertamina group are long term in nature, lasting for a period of at least 10 years. Most of the agreements will expire in 2031. These agreements also have a cost-plus pricing model, which allows PIS to pass through its actual bunker fuel cost and charter cost of the vessels to its customers.

Nonetheless, PIS is exposed to a significantly high degree of concentration risk in its customer base because over 90% revenue is generated from the Pertamina group. While the risk is partially tempered by the credit quality of the Pertamina group of companies, Moody's notes that its service agreements can be unilaterally cancelled by the customer group. Moody's, however, also notes that the Pertamina group has historically shown strong operational support to its companies.

While Moody's does not expect this to happen over the next 12-18 months given the role PIS plays in the Pertamina group, there is a lack of clarity over the longer term, particularly so with Pertamina's plan to reduce its shareholdings in its subsidiaries and its plan for its subsidiaries to be run more independently.

PIS has an aged fleet of 97 vessels with an average age of 19 years old. As such, PIS has significant capital spending plans with a budget of $4 billion over 2023-27 to scale up its core business.

PIS' fleet acquisition plan will focus on purchasing used vessels over the next two years before acquiring brand new vessels from 2026 because of low shipyard capacity currently. As the company's near-term target is to acquire used vessels, cost and timing may be difficult to predict.

Moody's believes that the fleet acquisition plan encapsulates the maximum number of vessels PIS will acquire, but the actual capital spending will likely be less or spread over a longer period of time. In 2023, the company planned to acquire seven vessels and it has only acquired two during the first six months of the year.

Moody's expects PIS' credit metrics to weaken over the next two to three years. Its adjusted debt/EBITDA will stay around 3.0x-3.5x over the next three years, compared with 1.0x in 2022, and retained cash flow (RCF)/net debt to decline to around 20%-30% from 126% over the same period.

ESG CONSIDERATIONS

PIS' ESG credit impact score of CIS-3 indicates that ESG considerations have a limited impact of PIS' current rating, with a greater potential for future negative impact over time. This is mainly driven by the company's exposure to environmental and social risks stemming from its operations within the integrated oil and gas value chain. In terms of governance considerations, despite the concentrated ownership (98.88%) by Pertamina, PIS has historically maintained prudent financial policies including modest shareholder returns. Also, despite being unlisted, PIS publishes its annual financial statements and maintains a degree of transparency into its operating performance.

LIQUIDITY

PIS has adequate liquidity over the next 12-18 months. As of 30 June 2023, the company had cash and cash equivalents of around $270 million. Excluding expansionary capital spending, Moody's expects its cash balance and projected cash flow from operations to be sufficient to support its maintenance capital spending, debt repayment and dividend obligations over the next 18 months.

Nonetheless, as a subsidiary of Pertamina, PIS has excellent access to banking lines. Upon the completion of Pertamina's corporate restructuring, PIS has successfully secured three sizeable syndicated loans totaling around $750 million from both state-owned and international banks over the past two years.

OUTLOOK

The stable outlook reflects Moody's expectation that PIS will maintain its leading position as the main shipping provider for the Pertamina group with a cost-plus structure that ensures margin stability. It also reflects Moody's expectation that the company will maintain financial prudence even as it pursues growth.

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

There is limited upward rating trajectory given the company's close linkage and high dependence on the Pertamina group. An upgrade of Pertamina's issuer rating will not automatically result in an upgrade of PIS' rating.

Moody's could downgrade PIS' rating if Pertamina's issuer rating is downgraded. Downward rating pressure would also arise if the strategic importance or contractual relationship between PIS and the Pertamina group of companies weakens.

Downward pressure on PIS' rating could also emerge if its credit metrics weaken significantly. Specific indicators that Moody's would consider for a downgrade include adjusted debt/EBITDA remaining above 3.5x-4.0x, RCF/net debt below 20%-25% and negative free cash flow generation for a prolonged period.

The principal methodology used in these ratings was Shipping published in June 2021 and available at https://ratings.moodys.com/rmc-documents/72792. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Pertamina International Shipping (P.T.) (PIS) is an integrated shipping and marine logistics company, providing shipping, marine and logistics services primarily in Indonesia. Established by Pertamina in 2016, PIS is today an integral company as the key domestic shipping provider within Pertamina's value chain. Since its appointment as Pertamina's subholding company for integrated marine logistics in 2021, Pertamina has transferred all its shipping vessels and six fuel/LPG terminals to PIS. As of June 2023, PIS operated more than 300 vessels, comprising 97 company-owned vessels and more than 200 chartered vessels. As of 30 June 2023, PIS is a 98.88% owned by Pertamina. (ends)