PEFINDO lowers the ratings for PT Waskita Karya (Persero) Tbk and its bonds to “idBBB+”, outlook remains negative

(July 7, 2020)--PEFINDO has lowered the ratings of PT Waskita Karya (Persero) Tbk (WSKT), its shelf-registered Bonds I/2015, shelf-registered Bonds II/2016, and shelf-registered Bonds II/2017 to “idBBB+” from “idA-” due to its high financial leverage and weak interest coverage, which no longer commensurate with an idA- rating, as well as our expectation that its financial leverage will continue to remain elevated as WSKT will continue to rely on external funds for working capital to carry out its contract backlog and investments. The outlook for the corporate rating is maintained at “negative” to anticipate further weakening in its credit profile due to the challenging operating environment and economic fallout caused by the coronavirus disease (COVID-19), particularly if the pandemic prolongs, which could lead to increased restrictions as well as operations and supply chain disruptions, including delays in new project tenders. For the first quarter of 2020 (1Q2020), its new contract wins were amounted to IDR3.2 trillion, a 24% decline year-on-year (YoY), depleting its contract backlog to IDR52.5 trillion as of March 31, 2020. This represents an order book to construction revenue ratio of 2.3x on a trailing 12-month basis, down from 3.6x average in 2015-2019. The negative outlook is also to anticipate heightened refinancing risk amid a deteriorating credit environment. WSKT has IDR2.5 trillion of bond maturing in October 2020, which it expects to refinance using internal cash. As of March 31, 2020, it had a cash balance of IDR6.1 trillion. It also plans to issue IDR4.95 trillion of shelf registration bond which will be used for refinancing and working capital. Nonetheless, given its leading market position and active participation in government infrastructure projects, we expect it will continue to have access to domestic liquidity sources, state-owned banks, in particular.

An obligor rated idBBB has an adequate capacity to meet its long-term financial commitments relative to that of other Indonesian obligors. However, adverse economic conditions or changing circumstances are more likely to weaken its capacity to meet its financial commitments. The plus (+) sign indicates that the rating is relatively strong within its category.

The rating reflects WSKT’s strong market position in the construction industry, its benefits as a major state-owned construction company, and its good margin. The rating is constrained by its high financial leverage and weak interest coverage, the relatively volatile business environment in the construction sector, and risks related to its aggressive toll road business expansion and divestment plan.

The rating may be lowered if WSKT’s leverage continue to remain high with limited likelihood for deleveraging and interest coverage falls to less than 1.0x on a sustained basis. We could also lower the rating if there is a substantial decline in new contract achievement, impacting the visibility of its revenue, and/or the risk of project completion delays and cost overruns increases due to COVID-19, particularly if WSKT could not impose any escalation on the latter, hence, reducing its profitability. We could revise the outlook to stable if WSKT improves its financial leverage and interest coverage ratios on a sustained basis supported by strong contract backlog which provides revenue visibility over the next few years.

WSKT is one of the largest construction companies in the country. Its main business, providing construction works, contributed 91% of revenue in 2019. Its other businesses include precast concrete, toll roads, property, and energy. It has an extensive domestic marketing network with 33 marketing offices throughout the country. The Indonesian government held a 66% stake in WSKT as of March 31, 2020, with the remainder publicly owned. (ends)