Moody's assigns first time (P)B1 CFR to Soechi; Outlook stable
Wednesday, June 10 2015 - 10:11 AM WIB
Proceeds from the issuance of the notes will be used to repay outstanding secured debt, acquire vessels, fund the interest service account and pay transaction fees. The notes will be guaranteed by Soechi and substantially all its subsidiaries on a senior unsecured basis.
Moody's will remove the provisional rating status upon completion of the issuance and satisfactory review of the final documentation.
"The (P)B1 CFR reflects the predictability of Soechi's revenues over the next 18-24 months, underpinned by long term time charter contracts on its existing fleet of 35 vessels at March 31, 2015, strong profitability margins and high barriers to competition due to favorable industry regulations, particularly the cabotage laws, which mandate the use of Indonesia-flagged vessels for domestic sea freight transportation" says Brian Grieser, a Vice President -- Senior Analyst at Moody's.
For 2014, time charter contracts accounted for 61% of shipping revenues, but 51.2% of total revenue and 87% of vessels on a dead weight tonnage (DWT) basis. As of April 30, 2015, Soechi's time charter contracts had a weighted average remaining life of 5.6 years weighted by contract value, including any optional extension periods. While certain time charter contracts begin to mature in 2015, we expect growing consumption of oil and gas in Indonesia to support increased demand for Soechi's vessels. Accordingly, we expect renewal and utilization rates to remain high and revenue to be predictable over the near term.
"Nonetheless, ratings are constrained at (P)B1 due to Soechi's small scale relative to global rating peers and high proforma leverage, of roughly 4.3x debt-to-EBITDA, which has been incurred to fund fleet expansion and the recent startup of shipbuilding operations" adds Grieser, also Moody's Lead Analyst for Soechi. "We expect Soechi to grow its fleet over the next few years but do not expect the vessel purchases to require incremental debt or to be acquired without underlying time charters in place."
Furthermore, the ratings also take into account Soechi's high customer and vessel concentration, with Pertamina (Persero) (P.T.) (Baa3 stable) accounting for over 50% of revenues in 2014 and the two Very Large Crude Carriers (VLCC) for an estimated 25% of shipping revenue in 2015.
Pertamina is the state owned oil and gas company in Indonesia responsible for processing all the oil and gas within the country. Soechi benefits from its longstanding relationship with Pertamina with its established track record of time charter contract renewal. This relationship is now being expanded into Soechi's new shipyard business as Pertamina has placed 3 of the 5 initial vessel orders currently being worked on by Soechi.
While most of the capital spending with regard to the shipyard business has been completed, Soechi's entrance into shipbuilding entails execution risk given the competitiveness of the bidding process for new vessels, the complexity and duration of the new vessel construction projects and the company's lack of a track record in executing its order book.
"The stable outlook is supported by the expectation that Soechi will continue to develop its relationship with Pertamina and will have adequate revenue visibility from its time charter contracts," says Grieser. "The outlook also takes into account the risk factors arising out of the formative stage of the capital intensive shipbuilding business and its relatively small contribution to the overall earnings."
The (P)B1 rating on the $200 million senior unsecured notes due 2020 reflects Moody's expectation that secured debt will benefit from encumbrances on 15% to 20% of total assets following the proposed notes issuance. As such, we expect unencumbered assets to provide sufficient coverage of unsecured notes and therefore have rated the notes at the same level as the CFR. Any significant increase in the amount of secured debt could result in the lowering of bond ratings.
The rating could be upgraded if management continues to successfully grow its shipping business while lowering leverage. Given Soechi's small scale and customer and vessel concentration, Moody's would expect debt-to-EBITDA leverage to be around 3.0x on a sustainable basis and interest coverage measured as (FFO + Interest)-to-Interest Expense over 4.0x before considering an upgrade. Furthermore, an upgrade is unlikely before its shipyard business can demonstrate its ability to execute its orders in a timely and profitable manner as well as sustain a modest backlog.
The rating could be downgraded if the company raises debt levels to fund new tanker acquisitions over the next 12-18 months or its shipbuilding business fails to meet its new build terms and is required to reimburse any installment payments to customers. Furthermore, downward pressure on the ratings could build should: 1) any legislative development arise that loosens cabotage laws; 2) Pertamina shifts management of its fleet such that it reduces its exposure to Soechi; or 3) either of Soechi's two VLCC's are out of service for an extended period.
In terms of credit metrics, debt-to-EBITDA leverage exceeding 5.0x or interest coverage below 2.25x could lead to a downgrade.
Soechi, headquartered in Jakarta, Indonesia, provides transportation services across the entire value chain in the oil and gas industry including transportation of crude oil from the producing fields to the refineries, petroleum products from the refineries to the end customers, petrochemicals and LPG distribution. As of march 31, 2015, the company operates a fleet of 35 vessels comprising 18 oil tankers, 12 chemical tankers, 3 gas tankers and 2 Floating Storage and offloading units having a total capacity of 1.34 million DWT. Soechi also operates a shipbuilding and maintenance business through its 99.99% subsidiary PT Multi Ocean Shipyard and has its shipyard in Karimun, in Malacca strait in close proximity to Singapore. (ends)