JAKARTA (TheInsiderStories)–Moody’s Investors Service has changed the rating outlook of PT Soechi Lines Tbk (Soechi) and Soechi Capital Pte. Ltd to negative from stable.
Moody’s has also affirmed the B1 corporate family rating (CFR) and B1 senior unsecured rating on the $200 million notes due 2023, issued by Soechi Capital Pte. Ltd., a wholly owned subsidiary of Soechi.
The notes are unconditionally and irrevocably guaranteed by Soechi and all its material subsidiaries, which own all of Soechi’s vessels and its shipyard.
“The negative rating outlook reflects Soechi’s weak credit metrics, resulting from a more aggressive debt-funded growth strategy than was previously anticipated,” says Brian Grieser a Moody’s Vice President and Senior Credit Officer.
Soechi increased its balance sheet debt by $49 million to $296 million in the first six months of 2018, driving its adjusted debt/EBITDA to 5.5x on a trailing 12-month basis.
The debt was primarily used to finance the acquisition of its first very large gas carrier (VLGC) and the conversion of one of its Aframax’s into a floating storage and offloading vessel (FSO).
Moody’s expects the earnings from these two transactions to meaningfully add to EBITDA in the second half of 2018 and in 2019, which should allow Soechi to reduce debt/EBITDA to between 4.5x and 5.0x in 2019.
While both the new FSO and the VLGC are tied to long-term contracts, which will improve Soechi’s business profile, the upfront costs of Soechi’s investments are increasing.
“The negative outlook also incorporates Moody’s view that management may be taking a more aggressive approach to growth, which will have a permanent impact on the company’s longer-term credit quality,” adds Grieser.
While Soechi’s growth strategy is pressuring ratings, Moody’s recognizes that the underlying business continues to perform within expectations.
EBITDA margins remain stable and above 40%, time charter contract renewals are occurring in a timely manner and at competitive rates, and the relationship with Pertamina (Persero) (P.T.) (Baa2 stable) is supporting its existing business and growth opportunities.
Soechi’s B1 CFR continues to reflect its (1) high degree of revenue visibility, around 90% of shipping revenue underpinned by long-term time charter contracts; (2) its strong margins and leading market position; (3) high entry barriers for new competition, resulting from favorable industry regulations, particularly the cabotage laws; and (4) a strong relationship with Pertamina.
Further, the CFR reflects Soechi’s (1) relatively small scale of operations globally; (2) the company’s significant reliance on its two very large crude carriers (VLCCs), which account for 38% of its dead weight tonnage; (3) increased leverage and weaker interest coverage; and (4) the still formative stage of its shipbuilding operations, which continues to be a drag on earnings and cash flows.
The rating could be downgraded if EBITDA growth from ongoing vessel conversions and recent vessel purchases do not materialize, resulting in debt/EBITDA remaining above 5.0x over the next 12 months or cash flow weakens, such that interest coverage, (FFO+Interest)/interest, falls below 2.25x.
Furthermore, downward pressure on the ratings could build if (1) any legislative development arises that would loosen cabotage laws; (2) Pertamina shifts management of its fleet such that it reduces its exposure to Soechi; or (3) Soechi begins paying larger, debt-funded dividends.
A rating upgrade is unlikely over the next 12-18 months, given its negative outlook.
The rating could be upgraded over time, if management grows its shipping business, while lowering its leverage profile. Given Soechi’s small scale, and customer and vessel concentration, Moody’s would expect leverage to be maintained around 3.0x and interest coverage of over 4.0x on a sustained basis before considering an upgrade.
Soechi Lines Tbk. (P.T.), headquartered in Jakarta, is mainly engaged in the business of providing crude oil, petroleum products and liquefied petroleum gas (LPG) shipping and shipyard services principally to companies operating in the domestic oil and gas and chemical sectors in Indonesia (Baa2 stable). Soechi operates a fleet of 40 vessels.
The company has also ventured into the ship-building and maintenance business through its 99.99% subsidiary PT Multi Ocean Shipyard.
Soechi is a family owned business with the members of the Utomo family holding an approximate 85% stake and the public the remaining 15%.