Moody's downgrades Jasa Marga's ratings to Baa3, maintains negative outlook

(Singapore, June 23, 2020) -- Moody's Investors Service has downgraded the issuer and senior unsecured ratings of Jasa Marga (Persero) Tbk (PT) to Baa3 from Baa2. The outlook remains negative.

RATINGS RATIONALE

The downgrade of Jasa Marga's ratings reflects a one-notch reduction in Moody's expectation of support from the Government of Indonesia (Baa2 stable) to Jasa Marga in times of need. "While Moody's continues to expect that Jasa Marga will receive government support in times of need, reflecting its important role of developing road infrastructure, the one-notch reduction in rating uplift considers the government's increasingly selective approach towards supporting the State Owned Enterprises given its current fiscal position, and Jasa Marga's comparatively lower strategic importance than other higher rated and more critical SOEs", says Ray Tay, a Moody's Senior Vice President.

The negative outlook continues to reflect Jasa Marga's exposure to the credit risks associated with the continued negative impact of the coronavirus outbreak on revenue. Moody's expects the contraction in traffic volumes on Jasa Marga's toll roads will weaken its cash-flow generation in 2020. Although the government has further eased social distancing measures, there is limited visibility on the subsequent recovery in Indonesian toll road volumes because of the unprecedented nature of the coronavirus outbreak.

Jasa Marga's Baa3 ratings reflect (1) its Baseline Credit Assessment (BCA) of ba2; and (2) a two-notch uplift based on Moody's expectation that the company will receive a strong level of support from the Government of Indonesia in the event that extraordinary financial support is required. Moody's had previously expected a higher level of support from the government.

The rapid and widening spread of the coronavirus outbreak, 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 toll roads sector has been affected by the shock given its direct exposure to government containment and regulatory measures, and its sensitivity to consumer demand and sentiment.

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. Moody's rating action reflects the potential impact on Jasa Marga of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

The negative outlook also reflects the increasing risk that Jasa Marga's financial profile will become weakly positioned for its current rating. More specifically, Jasa Marga will need to maintain funds from operations (FFO)/debt above 3.5% and interest coverage above 1.4x, both on a sustained basis, to support the ba2 BCA.

The weaknesses in Jasa Marga's financial profile, including limited buffers in its financial metrics and reliance on external financing during these uncertain times, have left it vulnerable to demand shifts under the current operating conditions. The company's credit profile is reliant on prospective traffic growth for its toll roads in development or ramping up to strengthen its financial profile to pre-coronavirus levels. Although it is seeking to reduce operating and capital expenditures in response to the coronavirus, there may be limited opportunities to materially reduce capital expenditure in 2020.

Jasa Marga is in discussions with bank lenders to reprofile bank debt servicing requirements to better align with cash flow at both the holding company and project levels during these uncertain times. Moody's understands from the company that these amendments to its bank loans are not aimed at avoiding default and that bank lenders have not suffered economic losses as a result of such actions. Jasa Marga continues to enjoy local bank and capital markets access, with successive drawdowns on liquidity facilities and local bonds continuing to trade near or above par value. The company is not engaged in any debt restructuring related to capital market instruments.

Recent regulatory actions amid the ongoing uncertainties associated with the coronavirus outbreak are also credit negative for Jasa Marga. Tariff adjustments for a number of Jasa Marga's toll roads have been postponed. While the company is eligible for compensation for this delay, uncertainty remains around the form, amount and timing of the compensation.

Notwithstanding the more challenging operating environment in 2020, demand for Jasa Marga's toll roads has historically been resilient, given continued economic growth and the favorable demographics of a growing middle class.

More generally, Jasa Marga's credit quality continues to reflect (1) robust demand dynamics; (2) Indonesia's resilient and high-density traffic profile; and (3) Moody's continued assumption of a strong level of government support, reflecting the toll road sector's national importance and Jasa Marga's leading position.

LIQUIDITY

Jasa Marga's liquidity in the coming 12 to 18 months is weak due to the negative cash flow impact of the coronavirus and committed capital expenditure payments. The company also announced dividend payments amounting to around 5% of the previous year's net profit, down from 15% the year before. The company also has IDR4 trillion of Komodo bonds coming due on 11 December 2020.

As of the end of May 2020, Jasa Marga had approximately IDR2.8 trillion of cash on its balance sheet. Liquidity is supplemented by IDR24.4 trillion in undrawn committed credit facilities, of which IDR4.4 trillion expires over the next 12 months. Jasa Marga is in talks with local banks to extend expiring facilities as well as to obtain more committed liquidity facilities. In addition, the company is assessing initiatives aimed at reducing its cost base and optimizing its investment spend, with the objective of further supporting its liquidity profile.

Given the reduction in earnings stemming from the more challenging operating environment, Moody's expects that Jasa Marga will need to provide support to some of its subsidiaries or investments with project-level debt to avoid covenant breaches for such debt. The liquidity requirements are uncertain and are dependent on the extent of traffic declines and project-level financial reserves available. Currently, one of Jasa Marga's subsidiaries has a pre-existing covenant breach that is technical in nature and related to the financial covenants. Banks have waived the breach for 2019, and Moody's is awaiting documentation on the waiver for 2020 and amendment to its financial covenants, which will prevent further breaches.

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

An upgrade is unlikely, given the negative outlook.

However, the outlook could return to stable if the company's financial profile and key credit metrics sustainably return to levels commensurate with the current rating within the next 12 to 18 months, while it maintains continued access to funding to bolster its liquidity profile. This can be the result of a combination of the following factors: (1) a less severe or prolonged contraction in traffic volumes than Moody's currently expects; (2) sufficient and timely compensation or government support to address the weaker credit metrics resulting from the tariff freeze and traffic decline; and/or (3) Jasa Marga's execution of operating and capital expenditure savings of sufficient magnitude.

Moody's could downgrade Jasa Marga's BCA, and hence its ratings, if FFO/debt falls below 3.5% and interest coverage below 1.3x-1.4x, both on a sustained basis. The ratings can also be downgraded if there is a lack of timely progress on improving liquidity, especially in terms of refinancing the upcoming Komodo bond.

Moody's could also downgrade Jasa Marga's ratings if Indonesia's sovereign rating is downgraded or if there is an indication of a continued decline in the company's strategic importance to Indonesia's toll road sector or the government, which could further reduce the level of government support available to the company.

Jasa Marga (Persero) Tbk (PT) is a listed company that is currently 70% owned by the Indonesian government. The government's shareholding level has remained at the same level since the company's initial public offering in 2007.

As of December 2019, the company operated 1,168 kilometers (km) of toll roads across various parts of Indonesia, or 55% of all toll roads by length in operation. In terms of total toll road concessions, it has the right to build, own and operate around 1,527 km of toll roads in total.

The Indonesian Toll Road Authority (BPJT) is the regulator for the industry and the concession counterparty for Jasa Marga. (ends)