Moody's downgrades Pelindo II's ratings to Baa3; outlook stable

(Singapore, June 23, 2020) -- Moody's Investors Service has downgraded the issuer and senior unsecured ratings of Pelabuhan Indonesia II (Persero) (P.T.) (Pelindo II) to Baa3 from Baa2.

At the same time, Moody's has also affirmed its Baseline Credit Assessment (BCA) of ba1.

The outlook on the ratings remains stable.

RATINGS RATIONALE

The downgrade of Pelindo II's ratings is driven by a one-notch reduction in Moody's expectation of support from the Government of Indonesia (Baa2 stable) to Pelindo II in times of need.

"The recalibration considers the government's increasingly selective approach towards supporting the State Owned Enterprises (SOEs) given its current fiscal position, and Pelindo II's comparatively lower strategic importance than the higher rated SOEs," says Spencer Ng, a Moody's Vice President and Senior Analyst.

While our expectation for extraordinary government support for Pelindo II remains high, it is now more consistent with a one-notch uplift to the rating in lieu of the previous two-notch uplift.

Pelindo II's Baa3 ratings reflect (1) its BCA of ba1, and (2) a one-notch uplift for parental support. This uplift considers the government's 100% ownership of Pelindo II and the port operator's pivotal role in Indonesia's maritime transportation sector, which underpins Moody's expectation of high level of government support in times of need.

"The affirmation of Pelindo II's BCA reflects our view that the port operator's credit metrics will remain above the minimum tolerance level, despite the expected reduction in trade volumes and revenue in 2020 as a result of the coronavirus outbreak," adds Ng.

The rapid and widening spread of the coronavirus outbreak, the 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 port sector is affected by the shock, given its exposure to declining cargo volumes stemming from weakening global trading levels and softer macroeconomic conditions. 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.

Pelindo II's standalone credit profile further considers (1) its strong market position, (2) its access to fixed rental revenue under long-term concessions with reputable counterparties, and (3) its moderate financial profile and robust liquidity position leading up to the coronavirus outbreak.

However, these credit strengths are offset by Pelindo II's sizable expansion plans, which entail execution risk and a large funding requirement.

Moody's base case scenario assumes trade volumes at Pelindo II's ports will decline in 2020, as a result of coronavirus-induced disruptions to global supply chains and reduced trade flow as governments impose preventative measures and economic conditions weaken, before recovering in 2021.

Under Moody's base case scenario, Pelindo II's financial leverage, as measured by funds from operations (FFO) to debt, will weaken to around the minimum tolerance level set for its ba1 BCA of 6%-8% in 2020, before recovering in 2021.

Its financial profile beyond the next 12 months will also be driven by its sizable debt-funded expansion program, which involves a capital expenditure of around IDR30 trillion over the next five years. The company has a track record of underspending its budget in recent years; if this continues, it will give the port operator additional financial headroom.

Pelindo II has sufficient liquidity -- including IDR20.8 trillion of cash on hand at the end of March 2020 and the projected operating cash flow under Moody's base case -- to meet its debt repayments, planned capital expenditure and dividend payments over the next 12 months.

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

Moody's could upgrade Pelindo II's ratings if there is (1) indication of an increase in likelihood of government support, or (2) a sustained improvement in the company's BCA.

Additionally, Moody's could raise Pelindo II's BCA if (1) the company maintains its solid financial profile — such that its FFO/debt remains above 10%-12% — after incorporating the additional debt necessary to fund its planned major capital spending program, and (2) there is no material change in its business profile.

However, Moody's could downgrade Pelindo II's ratings if the company's underlying credit quality deteriorates because of (1) an erosion of its dominant market share in its catchment area, with increased pressure on its profit margins because of rising competition, (2) significant cost overruns on its capital spending program, or (3) a weakening in its financial profile, such that its FFO/debt falls below 6%-8% or cash interest coverage falls below 1.50x-2.25x on a consistent basis.

Furthermore, a change in the government's shareholding level or policies to support the port industry could also lead to a downgrade of Pelindo II's ratings.

Pelindo II is Indonesia's leading port operator, with 12 ports across 10 provinces in Java, Sumatra and Kalimantan, including the country's largest and busiest container port, Tanjung Priok in Jakarta. The company is wholly owned by the Ministry of State Owned Enterprises and is regulated by the Ministry of Transportation. (ends)