Moody's changes Soechi's outlook to negative; affirms ratings

Singapore, February 14, 2022 -- Moody's Investors Service has affirmed Soechi Lines Tbk. (P.T.)'s B2 corporate family rating (CFR).

Moody's has also affirmed the B3 senior unsecured rating on the 2023 notes issued by Soechi Capital Pte. Ltd., a wholly-owned subsidiary of Soechi.

At the same time, Moody's has changed the outlook to negative from stable.

"The change in outlook to negative reflects the increasing refinancing risk stemming from the remaining $57 million outstanding on its bond coming due in January 2023," says Stephanie Cheong, a Moody's Assistant Vice President and Analyst. "While the company expects to upsize its secured loan facility to fully refinance the maturing bond, a binding and definitive agreement has yet to appear."

RATINGS RATIONALE

Soechi's unrestricted cash balance of $37 million as of 30 September 2021 and expected operating cash flows of around $56 million over the next 18 months will be sufficient to cover its debt amortization payments and maintenance capital spending. However, thereafter, there awill be insufficient funds to cover the remaining $57 million outstanding notes maturing in January 2023. As a result, Soechi is reliant on external funding to address its refinancing needs.

Soechi has historically been proactive in managing its liquidity and capital structure, and domestic banks have so far been supportive. In December 2020, the company obtained a $180 million secured seven-year amortizing term loan from PT Bank Mandiri (Persero) Tbk and PT Bank Central Asia, which was used to refinance an existing bank loan and buy back $143 million of its 2023 bonds through a series of tender offers.

Funding channels remain limited for Soechi and limited financial flexibility could challenge its ability to raise additional debt to address its maturing bond in a timely manner because Soechi's entire vessel fleet is already encumbered under its existing bank loans.

Nonetheless, the affirmation of Soechi's B2 CFR reflects Moody's expectation that the company's operating performance will remain stable, which should support its access to additional bank funding.

Soechi Lines' B2 CFR also reflects relatively high revenue visibility, with around 90% of its shipping revenue supported by time charter contracts, most of which are with Indonesia's state-owned oil and gas company, Pertamina (Persero) (P.T.) (Baa2 stable). The rating also reflects the high barriers to entry created by cabotage laws in Indonesia, which mandate the use of Indonesian-flagged vessels for domestic sea freight transportation.

Moody's expects Soechi's shipyard business to continue generating operating losses through 2021-22, weighing on overall profitability. However, the losses should not widen beyond 2020 levels as the company continues cutting costs at its shipyard.

The rating remains constrained by Soechi's relatively small operational scale compared with its global peers', and by its significant reliance on two very large crude carriers (VLCC), which account for 40% of the fleet's deadweight tonnage.

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

Given the negative ratings outlook, an upgrade of Soechi's ratings is unlikely over the next 12 months.

Nevertheless, Moody's could return the ratings outlook to stable if the company successfully refinances the remaining $57 million on its 2023 bond and maintains stable operating performance.

Moody's could downgrade the ratings if Soechi experiences any delays in refinancing its upcoming bond maturity.

The rating could also be downgraded if (1) industry fundamentals weaken, resulting in lower charter rates or Soechi's inability to renew expiring charter contracts; (2) operating losses at Soechi's shipyard do not moderate as expected over the next 12-18 months; (3) Soechi does not have ample liquidity to fund its operations and meet its debt amortization payments; (4) there are adverse changes in cabotage laws; (5) Pertamina shifts its management of its fleet, such that it materially reduces its exposure to Soechi; or (6) Soechi undertakes material debt-funded capital spending or shareholder returns.

Specific indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 5.5x or adjusted (FFO + interest expense)/interest expense below 2.0x.

The principal methodology used in these ratings was Shipping published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276306. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jakarta, Indonesia, Soechi Lines Tbk. (P.T.) provides shipping services primarily to oil and gas companies, including Pertamina (Persero) (P.T.) and its associates. Soechi also operates a shipbuilding and maintenance business through its 99.99%-owned subsidiary, PT Multi Ocean Shipyard.

Soechi is a family-owned business, with members of the Utomo family holding a stake of approximately 85% in the company and the public holding the remaining 15%. (ends)