PEFINDO lowers the ratings for PT Waskita Karya (Persero) Tbk and shelf-registered bonds II to “idBBB”

(November 18, 2020)--PEFINDO has lowered the ratings for PT Waskita Karya (Persero) Tbk (WSKT) and its shelf-registered bonds II to “idBBB” from “idBBB+”. The downgrade in ratings reflects our view on WSKT’s weak standalone credit profile over the near to medium term, due to the difficult operating environment caused by COVID-19, significantly delaying project completion, new project tenders, and cash collections. WSKT’s EBITDA dropped by 62% year-on-year (YoY) in the first half of 2020 (1H2020) while cash and cash equivalents dropped to IDR1.4 trillion as of Jun. 30, 2020 from IDR9.3 trillion as of Dec. 31, 2019. New contract wins in the nine months of 2020 (9M2020) were amounted to IDR12.2 trillion, a 19% decline YoY, depleting its order book to just IDR50.6 trillion as of Sep. 30, 2020, the lowest over the past five years. This represents an order book to construction revenue ratio of just 2.0x on a trailing 12-month basis, down from 3.6x average in 2015-2019. WSKT is in the process of a debt restructuring with its lenders in an effort to preserve liquidity and to provide working capital to execute its order book and investments. Though we view debt restructuring as credit negative, the outcome of it is expected to significantly benefit WSKT financially in the near to medium term. The outlook for the corporate rating is “stable”.

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 rating reflects WSKT’s strong market position in the construction sector, its benefits as a major state-owned construction company, and moderate financial flexibility. The rating is constrained by its weak liquidity, high leverage, and the volatile business environment in the construction sector.

The rating could be upgraded if WSKT significantly improves its leverage and debt service coverage on a sustained basis supported by strong contract backlog which provides revenue visibility over the next few years. The rating may be lowered if we believe that our assessment on WSKT’s financial flexibility deteriorates, which no longer supports our view on its moderate access to external funding to carry out its operating activities or refinance existing borrowings regularly at a short notice. We may also lower the rating if leverage continue to remain high with limited likelihood for deleveraging and debt service coverage falls to less than 1.0x on a sustained basis.

We could also lower the rating if WSKT continuously booked low new contracts, impacting the visibility of its revenue, 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.

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 Jun. 30, 2020, with the remainder publicly owned. (ends)