Moody's downgrades BULL to B2, outlook remains negative

(Singapore, November 11, 2021) -- Moody's Investors Service has downgraded Buana Lintas Lautan Tbk (P.T.)'s (BULL) corporate family rating (CFR) to B2 from B1.

The outlook on the rating remains negative.

RATINGS RATIONALE

"The downgrade reflects BULL's persistently narrow liquidity headroom because of its low cash balance, high debt amortization burden and reduced cash flow generation, given the still-weak tanker rate environment," says Stephanie Cheong, a Moody's Assistant Vice President and Analyst. "BULL faces higher refinancing uncertainty given its deteriorated funding access and the volatility in offshore capital markets."

BULL's liquidity is weak. Moody's estimates that the company's cash sources will fall short of its cash uses over the next 18 months. The company's liquidity sources comprise cash on hand of $5.1 million as of 30 June 2021, $32 million raised (from a rights issue, vessel sales and new bank debt), and free cash flow of $90 million over the 18 months to December 2022. These cash sources are lower than its debt maturities of $170 million over the same period, which relate mostly to scheduled debt amortization payments of term loans raised to fund the company's fleet expansion since 2018.

BULL's $27 million short-term investment in fund manager Suisse Charter Investment Ltd as of 30 June 2021 can help cover a portion of the shortfall, as the company could liquidate the investment with a 30-day notice.

While the company is exploring various refinancing arrangements for its upcoming debt maturities and a potential equity raising, the execution timing of its plans -- and any fallback arrangements should these measures not come to fruition -- remains highly uncertain.

Tanker charter rates halved in the second half of 2020 after reaching record-high levels in March-May 2020. This weak tanker freight rate environment has lowered BULL's earnings and operating cash flows, pressuring its liquidity.

Moody's has a stable view on the tanker market globally and expects a pickup in global economic activity to increase oil demand, which will keep tanker rates stable over the next six to 12 months.

In the near term, BULL's debt/EBITDA leverage will weaken to 4.2x as of the end of 2021 from 3.7x as of 30 June 2021, because of low tanker rates in the first nine months of the year. A gradual recovery in tanker rates since October 2021 and Moody's expectation of at least stable rates over the next six to 12 months should support an improvement in leverage toward 3.5x in 2022.

BULL's B2 rating also considers the company's small scale and its shift away from chartering its fleet primarily with Pertamina (Persero) (P.T.) (Baa2 stable) to also chartering vessels in international waters. This shift provides upside potential when charter rates are favorable but subjects BULL to contract renewal and repricing risks. While around 85% of BULL's fleet remains underpinned by time charter contracts which provides some revenue visibility, the contracts are short at around one year and will mostly expire in the next 12 months.

At the same time, the rating continues to reflect BULL's strong margins relative to its global peers' and the sector's high entry barriers for new competitors in Indonesian waters because of favorable industry regulations, particularly cabotage laws.

The negative outlook reflects BULL's high refinancing risk and uncertainties around its ability to address its large debt amortization payments over the next 12-18 months, given its deteriorated funding access and the volatility in offshore capital markets.

In terms of environmental, social and governance (ESG) factors, the ratings considers governance risks arising from the company's concentrated ownership structure, aggressive financial strategy and weak liquidity management.

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

Given today's rating action, an upgrade is unlikely in the short term. However, Moody's could change the outlook back to stable if BULL addresses its substantial near-term debt maturities and materially improves its liquidity and debt structure.

On the other hand, the ratings are likely to be downgraded further if BULL fails to materially improve its liquidity and refinance its large debt maturities by the end of January 2022, or if BULL's liquidity deteriorates further, either because (1) industry fundamentals weaken, resulting in lower charter rates or an inability to renew expiring charter contracts; (2) there are adverse changes in cabotage laws; (3) Pertamina shifts the management of its fleet, such that it materially reduces its exposure to BULL; or (4) BULL undertakes further material debt-funded capital spending or shareholder returns.

Specific indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 5.0x or adjusted (funds from operations + interest expense)/interest expense below 3.0x.

The principal methodology used in this rating 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, and founded in 2005, Buana Lintas Lautan Tbk (P.T.) (BULL) provides shipping services primarily to oil and gas companies, including Pertamina (Persero) (P.T.) (Baa2 stable) and its associates. BULL operated a fleet of 37 vessels as of 30 June 2021. (ends)