PEFINDO revises PT Kereta Api Indonesia (Persero)’s outlook to Negative, affirms rating at “idAAA”

(May 11, 2020)--PEFINDO has affirmed its “idAAA” rating to PT Kereta Api Indonesia (Persero) (KAII), its Bond I Year 2017, and Bond II Year 2019. The outlook for the corporate rating was revised to “negative” from “stable” to anticipate deterioration in its credit profile owing to weakening demand for railway transportation stemming from the coronavirus disease (COVID-19) outbreak. Rail traffic has been severely affected by the implementation of large-scale social restrictions (PSBB) imposed by the government to contain the spread of COVID-19, leading to a sharp decline in passenger numbers and train services offered. KAII’s average daily ridership was down by 78.4% to 275,827 on March 31, 2020 from 1,274,230 on March 2, 2020, the day the government announced the first COVID-19 cases. This has brought KAII’s passenger revenue, which account for about one-third of revenue, to decline by 10% year-on-year (YoY) to IDR1.9 trillion during the first quarter of 2020 (1Q2020). As a result, EBITDA margin dropped to 14.8%, the lowest since 2013. We are of the view that demand for passenger rail transportation will remain difficult over the near to medium term and will continue to constrain KAII’s revenue and cash flow generation, hence, pressuring its credit metrics and liquidity, the latter of which we believe will be mitigated by its strong access to domestic liquidity sources, state-owned banks in particular. Given the high degree of uncertainty around the extent and duration of the pandemic, we will continue to monitor KAII’s operating and financial performance over the next few months to measure performance expectations and quantify any potential deviation from our base-case scenario.

An obligor rated idAAA has the highest rating assigned by PEFINDO. The obligors’ capacity to meet its long-term financial commitments, relative to that of other Indonesian obligors, is superior.

The rating reflects our view of the government’s strong potential support to KAII due to the strategic importance of railway transportation, its superior business position in the railway sector in Indonesia, and good long-term growth prospects from passenger volume and freight transportation. However, KAII’s expected weaker financial profile due to COVID-19 related disruptions and its high leverage and weakened cash flow indicators, constrain its rating, in our view.

The rating could be lowered if we view the government’s commitment to provide support, particularly during the COVID-19 pandemic, has weakened, such as through a material divestment of ownership, a decreasing public service role, and/or high dividend distribution in this uncertain time, which could in turn weaken its liquidity. A significant change in the regulatory framework that could negatively affect KAII’s business and financial prospects may also trigger a rating downgrade. The rating could also be under pressure if the extremely difficult operating environment caused by the COVID-19 pandemic is prolonged or KAII pursues a more aggressive financial policy as indicated by its less flexibility to reschedule capital expenditure (capex) amid COVID-19, hence, higher debt than projected. This do not include capex for the LRT Jabodebek project as funding is fully guaranteed by the government. We could revise the outlook to stable and affirm the rating if we view the operating environment has improved and stabilized, we see further mitigating actions by KAII to minimize the COVID-19 impact, and/or financial support by the government, which could support cash flow generation during and after the COVID-19 pandemic.

KAII is a state-owned rail operator, providing passenger transport and freight rail services. It is the sole user of the government’s railway infrastructure. It is supported by six subsidiaries: Kereta Commuter Indonesia (KCI), Railink, KA Logistik, KA Properti Manajemen, Reska Multi Usaha, and KA Pariwisata. It was 100% owned by Indonesian government as of March 31, 2020. (ends)