Singapore — Moody’s Investors Service has affirmed Pelabuhan Indonesia II (Persero) (P.T.)’s (Pelindo II) Baa3 issuer and senior unsecured ratings. Moody’s has also lowered Pelindo II’s baseline credit assessment (BCA) to ba1 from baa3, reflecting the company’s standalone credit quality.
The ratings outlook is positive.
Pelindo II’s Baa3 issuer rating reflects: (1) its BCA of ba1; and (2) a one-notch uplift based on Moody’s expectation that the company will receive a high level of support from the Indonesian sovereign (Baa3 positive) in times of need.
“Pelindo II’s BCA reflects its leading position in Indonesia’s ports sector with high barriers to entry and the continued favorable domestic industry dynamics”, says Ray Tay, a Moody’ Vice President and Senior Credit Officer.
“However, the BCA considers Pelindo II’s plan to undertake significant expansionary capex in the next three years, resulting in potential weakening in its financial metrics to levels that are more consistent with a BCA of ba1”, says Tay, who is also the lead analyst for Pelindo II.
Although Pelindo II is likely to be measured in its capex spend, which would be consistent with its historical practice, the lower BCA nevertheless provides headroom should the company’s expansion plans materialize.
“Over the next 1-3 years, Moody’s expects the ratio of Funds from Operations (FFO)/Adjusted Debt to be in the range of 7%-10%, assuming that the company proceeds with its port expansion as planned”, Tay says, adding “These metrics are within our expectation for Pelindo II’s BCA of ba1”.
Moody’s assumption of support is consistent with Moody’s joint-default analysis approach for government-related issuers and is based on the government’s full ownership of the company, and the fact that Pelindo II plays a pivotal role in Indonesia’s maritime transportation sector.
Moody’s believes that the Indonesian government will provide a high level of support, if required, in light of Pelindo II’s strategic role and the government’s full ownership through the Ministry of State Owned Enterprises.
As the gateway for Indonesia’s international trade, Pelindo II is exposed to the global trade environment and this exposure is evident from the volatile growth rates seen in the container segment over the past few five years.
As a defensive measure, Pelindo II’s revenue profile features a material level of recurring income in the form of rental payments from the container terminals it leases to other operators under concession contracts. Such income is largely insulated from volume risk and partially mitigates the impact of volatile container throughput.
Nonetheless, Pelindo II is a significant shareholder in these concessionaires, which results in some retention of volume risk despite the fixed payments.
The government has indicated that it is in the process of setting up a maritime holding company which will hold its stakes in port and shipping companies. We will assess the impact on Pelindo II’s credit profile once more details become available.
The ratings outlook is positive, reflecting the positive outlook on Indonesia’s sovereign rating and Pelindo II’s strategic role as the key international maritime gateway for Indonesia, given its control of the terminals in Jakarta.
Given Pelindo II’s BCA of ba1, under our joint default approach for Government Related Issuers, an upgrade of the Indonesian sovereign could lead to an upgrade of Pelindo II’s ratings, if the company’s underlying credit quality remains consistent with its BCA.
Absent an upgrade to the sovereign rating, an upgrade to Pelindo II’s ratings is highly unlikely, because the company’s business profile is highly dependent on the Indonesian economy.
We expect Pelindo II’s financial metrics to be at the lower end of the BCA tolerance — assuming the company proceeds with its expansion plans– thereby limiting any upgrade of its BCA.
Given the positive outlook, Pelindo II’s ratings are unlikely to be downgraded. However, the outlook could return to stable if Moody’s further lowers the BCA of Pelindo II because of a weaker financial performance as the result of: (1) unfavorable policy/regulatory decisions; (2) weak throughput and increased pressure on its profit
margins due to a weaker trade environment or stronger competition; and/or (3) significant cost overruns for its capex plan.
Metrics indicative of a downward revision in its BCA include funds from operations (FFO)/debt falling below 6%-8%, and/or cash interest coverage falling below 1.5x-2.25x on a sustained basis.
Pelabuhan Indonesia II (Persero) (P.T.) (Pelindo II) – also known as IPC – is Indonesia’s leading port operator, with 12 ports across 10 provinces in Java, Sumatra and Kalimantan.
Pelindo II handled 6.2 million 20-foot equivalent units (TEUs) in 2016, about 45% share of container throughput among the four Pelindo companies in Indonesia. It also operates Indonesia’s largest and busiest container port, Tanjung Priok in Jakarta, which handled over 5.5 million TEUs in 2016. The port is Indonesia’s main international container gateway.
Pelindo II is wholly owned by the Ministry of State Owned Enterprises and is regulated by the Ministry of Transportation.