Fitch Ratings has affirmed Indonesia-based port operator PT Pelabuhan Indonesia II (Persero)’s (Pelindo II) Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.
The outbreak of the coronavirus and the government measures worldwide to contain the pandemic create an uncertain global environment for the seaport sector. Pelindo II’s most recently available data may not have indicated a performance impairment, but material changes in revenue and cost profile are occurring across the seaport sector and will continue to evolve as economic activity and government restrictions respond to the ongoing situation. Fitch’s ratings are forward-looking in nature, and we will monitor developments in the sector as a result of the pandemic in terms of severity and duration, and incorporate revised base and rating case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.
The pandemic has resulted in weaker domestic and export demand for Indonesia. Pelindo II’s container throughput declined by 10.4% to 2.8 million twenty-foot equivalent units (TEU) up to May 2020, although this decline is less drastic than Indonesia’s import and export (EXIM) drops. The May throughput data was also affected by slowing EXIM activity ahead of the Eid al-Fitr holidays. Management believes container throughput could improve following the festival.
We believe Pelindo II has sufficient liquidity with no near-term debt maturities, offsetting the uncertainty over cargo throughput due to COVID-19. Pelindo II had about INR18 trillion in cash balance by end-2019 and no material debt repayment until 2025. The company has budgeted intensive capex for capacity addition and improvement of road and waterway access. However, we think the company has timing flexibility in delaying some of the planned capex to preserve its liquidity.
The rating considers Pelindo II’s market-leading position in Indonesia’s container port industry, the strategic location of its flagship Tanjung Priok port as well as the long-term maturity of its concessions, which ensures visibility of group cash-flow generation. Pelindo II also benefits from stable rental income from its joint ventures (JV) under a landlord-tenant model, despite moderate flexibility in modifying tariffs.
Pelindo II’s leverage will average 3.5x over the five-year forecast period of 2020-2024 under Fitch’s rating case. We believe Pelindo II’s leverage is commensurate with a ‘bbb’ underlying rating. Pelindo II’s IDR reflects the company’s underlying rating and does not include any support from its sole shareholder, the Indonesian sovereign (BBB/Stable).
Government-Related Entity Assessment
We assess Pelindo II’s linkages with the Indonesian government under our Government-Related Entities Rating Criteria. The criteria consider the strength of linkages between Pelindo II and the government as well as the government’s incentive to provide support to the company.
Strength of Linkages: Fitch sees Pelindo II’s status, ownership and control by the sovereign as ‘Strong’. The state fully owns the company and appoints its commissioners and board. It also controls its investment plans and capex decisions. We also assess the support record and expectations of state support to Pelindo II as ‘Strong’. There is no record of the government providing tangible support to the company, as Pelindo II has a sound financial profile. However, we expect the company to receive government support, if needed, due to its important role in the country’s economic development.
State’s Incentive to Support: Fitch sees the socio-political implications of a default by Pelindo II as ‘Moderate’. A default would damage the government’s reputation, but we do not believe it would cause a severe disruption to Indonesia’s trade activity, as port infrastructure would remain intact and could be operated by other entities. Our assessment of the financial implications of a default by Pelindo II is ‘Strong’, as the company is regarded as one of Indonesia’s key state-owned entities and a default would hamper investor confidence in the sovereign and other state-owned entities.
KEY RATING DRIVERS
Market-Leading Port Operator – Revenue Risk (Volume): Midrange
Pelindo II operates the primary ports of call within its served region. Its flagship, Tanjung Priok, is the gateway port to Jakarta, accounting for more than 40% of Indonesia’s container throughput. Pelindo II has a dominant container market share with limited competition. Its traffic is mainly origin and destination, with limited transhipment cargo. Pelindo II’s throughput follows economic and business cycles. Its container throughput fell 8% in 2015 when Indonesia’s commodity sector experienced a downturn. The concessions for most of its ports have 50-year terms, ending in 2065. Land access to Pelindo II’s ports is largely via road transport with limited rail connection, although Pelindo II is constructing an inland waterway connecting to Tanjung Priok. Pelindo II is also developing a 34km three-lane toll road with its JV partners to connect Tanjung Priok with its hinterland with the aim of easing traffic congestion near the port. Tanjung Priok, with a draft of 16 metres, can handle vessels of 12,000 TEUs and is positioned as the country’s transhipment hub.
Fixed Rental Income: Revenue Risk (Price) – Stronger
Pelindo II receives fixed rental income from its JVs. Fitch’s rating case forecasts higher rental income following the commission of CT2, a new terminal in Tanjung Priok. The company’s fixed rental income insulates its revenue from throughput volatility during economic downturns. Pelindo II’s tariffs are commercially negotiated with shipping associations, but require consultation with the Ministry of Transport. This limits the company’s pricing flexibility, demonstrated by flat tariffs for its international containers over the past few years. However, tariffs on domestic containers have been increasing. Once fixed, the tariff structure remains valid for at least two years. Pelindo II’s predominantly international origin and destination cargo profile underpins its pricing power and operating margin.
Large Capex Plan: Infrastructure Development and Renewal – Midrange
The utilisation rate of container capacity remains elevated at Tanjung Priok, despite capacity addition from the commissioning of the NPCT1 terminal in 2016. Pelindo II is constructing CT2 and CT3 to add container capacity and is also developing Kijing Port and Sorong Port to support economic growth in Kalimantan and east Indonesia. Fitch believes the company has timing flexibility in delaying some of these capex to preserve its liquidity amid the COVID-19 pandemic and lockdown in Indonesia. Fitch forecasts total capex of IDR25 trillion over the forecast period under our rating case. We expect the company’s cash balance and operating cash flow to be sufficient to fund capex and dividend distributions, but have not included management’s IPO plans in our forecasts as IPO timelines and valuations are subject to market conditions.
Bullet Bond Presents Refinancing Risk: Debt Structure – Midrange
Pelindo II’s consolidated debt comprises mainly senior unsecured bonds. The predominant use of US dollar bullet bonds presents a significant refinancing risk, although this is mitigated by Pelindo II’s established capital-market access. Pelindo II has limited exposure to floating interest rates in light of its fixed-rate bonds. However, the debt structure assessment is constrained by a lack of covenants and reserve accounts for its bonds.
Pelindo II’s closest peer is PT Pelabuhan Indonesia III (Persero) (Pelindo III; BBB-/Stable, underlying rating: bb+). Pelindo II has the largest container market share in Indonesia, followed by Pelindo III. Pelindo II benefits from stable rental income from JVs and thus is better placed than Pelindo III. Both companies have aggressive capex plans to support the development of the Indonesian maritime industry. Pelindo II has lower average leverage than Pelindo III.
ABP Finance Plc (A-/Stable), which operates 21 ports in the UK, benefits from its perpetual ownership of port assets and its landlord-tenant business model with long-term take-or-pay contractual arrangements. ABP has much higher leverage than Pelindo II, but ABP’s debt includes extensive financial covenants, securities and other creditor-protective features.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Sustained improvement of Fitch-adjusted net debt/EBITDAR below 3.0x under Fitch’s rating case over five years
– Upgrade of Indonesia’s sovereign rating combined with strengthening linkages with the government
Factors that could, individually or collectively, lead to negative rating action/downgrade:
– Weak financial performance due to lower volume as a result of the pandemic and sustained lockdown, credit erosion of terminal operators that results in rental payment delinquencies, increased costs or additional indebtedness for distributions leading to a projected five-year average Fitch-adjusted net debt/EBITDAR above 4.0x under Fitch’s rating case
– Deterioration in liquidity levels for a sustained period
– Downgrade of Indonesia’s sovereign rating
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
The Fitch base-case forecasts container throughput will decline by 8% in 2020 and rebound by 6.8% in 2021 in line with GDP recovery. We assume container throughput will subsequently rise in line with five-year GDP CAGR of 5% and throughput in 2024 will be boosted by the commissioning of the NPCT2/3 terminals and Kijing Port. We forecast throughput will increase at a 2.8% CAGR between 2019 and 2024, reflecting our current assessment of the impact of the pandemic on the throughput growth. We assume container tariffs will track Indonesian inflation. We assume EBITDA margin will average 30% and total capex will amount to IDR25 trillion during the forecast period. Our revised Fitch base case generates an average adjusted net debt/EBITDAR average of 2.8x over 2020-2024, with a maximum of 3.5x in 2022.
The Fitch rating case assumes 10% container throughput decline in 2020, and a rebound of 6% in 2021. We apply a 20% haircut to the Fitch base case container throughput growth assumptions thereafter. We forecast throughput will increase at a 1.6% CAGR between 2019 and 2024, reflecting our current assessment of the impact of the pandemic on the throughput growth. We assume container tariffs will increase by 2% per year. We assume its EBITDA margin will average 27% and total capex will amount to IDR25 trillion during the forecast period. Our revised Fitch rating case generates an average adjusted net debt/EBITDAR of 3.5x, with a maximum of 4.6x in 2022.
Source: Fitch Ratings