Publicly listed firm, PT Wijaya Karya Tbk (IDX: WIKA) will offer conventional and sharia bond with targets Rp5 trillion (US$340.14 million) - Photo by the Company

JAKARTA (TheInsiderStories) – Fitch Ratings has downgraded Indonesian government-owned construction company PT Wijaya Karya Tbk‘ (IDX: WIKA) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to ‘BB-‘, from ‘BB’. At the same time, the agency has downgraded the issuer’ National Long-Term Rating to ‘A(idn)’ from ‘AA-(idn)’.

All ratings have been placed on Rating Watch Negative (RWN). The downgrade follows Fitch’ revision of WIKA’ Standalone Credit Profile (SCP) to ‘b-‘ and ‘bbb-(idn)’, from ‘b’ and ‘bbb+(idn)’, respectively. This reflects second quarter (2Q) of 2020 performance that was significantly weaker than we expected, with the issuer’ leverage (measured by net debt/EBITDA) increasing to above 5x.

It said, the level above which Fitch would consider negative rating action. We forecast leverage to remain high for the next few years. The RWN signals a potential re-assessment of Fitch’ view of government linkages. WIKA, along with a number of other government-owned construction companies, last received tangible government support in 2016.

The government’ pandemic-related support amounts to around Rp695 trillion (US$47.00 billion), or 4.4 percent of gross domestic products, and includes direct cash transfers, provision of foods, guarantees and tax incentives. However, support to WIKA has not been forthcoming, despite its weakening financial profile.

Accordingly, Fitch is reviewing government support to determine whether it has weakened. The company’ Rupiah benefits from a three-notch uplift from its SCP for government support in light of its strategic importance to Indonesia’ infrastructure program.

“We have chosen a three-notch uplift given WIKA’ position as one of Indonesia’s largest government-owned construction companies, with a strong record of executing strategic infrastructure projects,” said the report.

The state-owned construction firm, which lead the country’ infrastructure program, must overcome regulatory and bureaucratic hurdles and investment in projects that have long payback periods on behalf of the government. The projects are largely turnkey contracts where payments are received only upon completion, pressuring companies’ financial performance.

Therefore, private-sector and foreign companies tend to shy away from government projects, increasing the government’ reliance on, and importance of, large government-owned companies, such as WIKA. In accordance with Fitch’ policies, the issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original rating committee outcome.

‘A’ National Ratings denote expectations of a low level of default risk relative to other issuers or obligations in the same country or monetary union.

The government last provided tangible support in the form of a Rp4 trillion equity injection in 2016 to promote WIKA‘ order-book growth and the execution of large strategic projects. Its credit metrics have deteriorated over 2020 on account of the pandemic, however, support has not been forthcoming. This raises questions about the ability and willingness of the government to provide consistent support.

“We estimate that WIKA’ new contract wins in 2020 will drop by around to 60 percent to Rp17 trillion and that revenue will plunge by around 45 percent due to significant short-term business disruption caused by the coronavirus pandemic and the resultant slowdown in tenders and construction activity,” the report stated.

New project tenders are likely to dip as the pandemic takes a toll on business activity, while construction is also set to slow due to social-distancing measures. Fitch expect leverage will rise to around 14.0x in 2020 from 2019 at 3.6x due to the pandemic, then improve to 6.2x in 2021. Leverage is likely to stay at 5.0 – 5.5x in the medium-term as WIKA role in the government’ infrastructure program expands its investment pipeline and raises capital expenditure in the next few years.

Work on new contracts that were halted in 1H of 2020 will gradually resume and WIKA will rush to complete its backlog, increasing project completions in 2021. We think WIKA will continue to rely on debt to bridge the FCF deficit associated with its government contracts.

“Our rating-case assumes that business activity will start to improve from late 2020 and that major project tenders will resume in 2021, boosting WIKA‘ new-contract growth. However, a prolonged pandemic may prompt the government to reallocate resources away from infrastructure projects to combat the virus and cause the private sector to shy away from expansionary activity,” said Fitch.

This would reduce the number of contracts up for tender and affect WIKA’ financial profile for a longer period. Another risk to our medium-term forecasts is the uncertain timing and trajectory of sector recovery from the unprecedented severity of the economic downturn, especially amid the possibility of a second wave of infections and a return to lockdown measures.

Fitch assesses WIKA‘ status, ownership and control as ‘Strong’. The Indonesian government owns 65% of WIKA, mainly via the state own enterprises ministry, and has strong influence over its investment decisions, strategy and operation. The government also holds a golden share that gives it veto power over the appointment and dismissal of board members, distribution of profit and M&A.

WIKA lends its balance sheet to government-related infrastructure projects. Under this practice, the funds working capital in arrears so key projects can be completed promptly, making WIKA vital for the government’s infrastructure growth drive.

Fitch believes a default by WIKA would have a minimal impact on the ability of the sovereign and other government-related entities to raise financing. WIKA has limited capital market exposure, mainly via its Komodo senior unsecured notes.

Nevertheless, Fitch may reassess this factor should there be evidence that WIKA’ default may have a moderate impact on other GREs’ fundraising activities.

US$1: Rp14,800

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