S&P: PT Apexindo Pratama Duta Assigned 'B+' Rating with Stable Outlook; Proposed Notes Rated 'B+'

(SINGAPORE, Sept. 17, 2013) -- Standard & Poor's Ratings Services today assigned its 'B+' long-term corporate credit rating to Indonesia-based oilfield drilling services company PT Apexindo Pratama Duta Tbk. The outlook is stable. At the same time, we assigned our 'axBB' long-term ASEAN regional scale rating to the company. We also assigned our 'B+' long-term issue rating to a proposed issue of US$400 million senior secured notes due 2018 that Apexindo guarantees. Apexindo Netherlands B.V., a special purpose vehicle of Apexindo, will issue the notes.

"The rating on Apexindo reflects the company's participation in a competitive industry and ownership by financial sponsors. The rating also reflects Apexindo's customer, geographic, and asset concentration, and high debt leverage," said Standard & Poor's credit analyst Rajiv Vishwanathan. "The company's strong market position in Indonesia and the high credit quality of its customers temper the above risks. Apexindo's strong operating and profitability record and revenue visibility arising from medium-term contracts further underpin the rating."

Apexindo's "weak" business risk profile reflects the company's small fleet and limited asset diversity, which heightens exposure to unplanned downtime at any of its rigs. Apexindo operates eight onshore drilling rigs, four swamp barges, two jack up rigs, and one floating production storage and offloading vessel. The jack up rigs contribute more than 55% of the company's EBITDA.

Apexindo derives all its revenue from its operations in Indonesia, and 70% of it from a single customer, Total S.A. However, the company's market position in Indonesia is strengthened by industry regulations that promote the use of local drilling companies. Apexindo is one of the few local companies that directly qualify under this regulation. The requirement of a local flag for swamp barges further improves Apexindo's position in Indonesia and reduces short-term demand volatility.

The current medium-term contract backlog of US$762 million through 2017 supports Apexindo's business. We expect Apexindo's above-average profitability to remain strong over the next 18-24 months. This is because of the company's high utilization levels, contracted increase in day rates in 2013-2017, and a low cost base that partly stems from the use of local skilled manpower.

Apexindo's "aggressive" financial risk profile reflects its high debt. Apexindo took on more debt to fund asset maintenance and upgrades, following the purchase of the company by new owners in 2012. However, we expect Apexindo's capital expenditure and asset purchases to be minimal in the next 12-24 months.

Apexindo's liquidity is "adequate," as defined in our criteria. We expect the company's sources of liquidity to be less than 1.2x its uses in 2013. However, we believe that Apexindo's liquidity is sufficient because we have assumed that the company will refinance its existing debt obligations in 2013 with proceeds from the proposed US$400 million bond.

"The stable outlook on Apexindo reflects our view that the company's profitability will improve over the next 12-24 months," said Mr. Vishwanathan. Apexindo's low capital expenditure and contracted drilling backlog also support our outlook. The stable outlook assumes that proceeds from the proposed bonds will support the company's liquidity position.

We may lower the rating if Apexindo's liquidity position weakens or its FFO-to-debt ratio falls below 12% on a sustained basis. This could happen in 2013 if the company's average offshore utilization rate reduces by 5% and its EBITDA margin declines by about 300 basis points from the average of 45% over the past 18-24 months. A sharp reduction in the day rates at the time of contract renewals on the offshore rigs could also pressure on the credit metrics. We may also lower the rating if Apexindo is unable to refinance its existing debt obligations through the proposed bond.

We do not expect to upgrade Apexindo over the next 12 to 18 months given the limited scale of the company's assets, its business risk profile, and its ownership by financial sponsors. We would consider an upgrade if Apexindo's business risk profile significantly improves and its FFO-to-debt ratio is above 20% on a sustained basis. A material reduction in asset and customer concentration would underpin the improvement in the business risk profile. Apexindo's cash flows could improve if day rates increase, utilization rates on all rigs remain high, and EBITDA margins stay stable or improve because of prudent cost management. An increase in the company's order book coupled with significant improvement in onshore drilling could also support such a strengthening in cash flows. (ends)