Moody's Investors Service has affirmed PT Pan Brothers Tbk (IDX: PBRX)'s B1 corporate family rating - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service has affirmed PT Pan Brothers Tbk (IDX: PBRX) B1 corporate family rating (CFR). At the same time, The agency has affirmed the B1 senior unsecured rating on the 2022 notes issued by a wholly owned subsidiary, PB International BV, and guaranteed by the company and all its subsidiaries.

Moody’s has also revised the outlook on these ratings to negative from stable.

“The change in Pan Brothers’ ratings outlook to negative primarily reflects the uncertainty associated with the refinancing of its core US$138.5 million revolving credit facility due February 2021, amid more challenging credit conditions and heightened global and regional turbulence,” says Stephanie Cheong, a Moody’s Analyst.

She added, “In the absence of concrete near term arrangements to refinance Pan Brothers’ core facility, the rating is likely to be subject to increasing pressure.”

Pan Brothers’ cash balance of $64 million as at 30 September 2019 will be sufficient to cover its operating cash needs, planned capital spending, short-term debt repayments and projected dividends over the next 12 – 18 months. But the balance is insufficient to cover its $138.5 million revolving credit facility maturing in February 2021, which the company mainly uses to fund its working capital.

While the company has a track record of strong shareholder support, and management has historically been proactive in managing its capital structure, current market conditions could prove challenging for Pan Brothers’ refinancing efforts.

“Nonetheless, the affirmation of Pan Brothers’ B1 CFR reflects our expectation that the company’s operating performance will remain healthy and which will support its access to replacement funding,” adds Cheong.

Pan Brothers’ EBITDA has grown at an average rate of 10% over the last three years, supported by its longstanding relationships with major global apparel retailers and ongoing investments in expanding its production capacity. Moody’s expects that Pan Brothers’ ongoing capacity expansion projects will support revenue and EBITDA growth over the next 12 – 18 months.

Moody’s points out that while Pan Brothers’ profitability will stay steady, the company’ free cash flow will remain negative over the next 12 – 18 months, as the company’ working capital needs increase to support

the ramp up of new production facilities, and as it continues to invest in increasing its production capacity. As a result, Pan Brothers’ reliance on external funding will increase, and leverage — as measured by debt-to-EBITDA , will likely stay elevated at 4.5x over the next 12 – 18 months, with such a level remaining within the thresholds set for its B1 rating level.

In terms of environmental, social and governance factors, Moody’s has considered the governance risk stemming from Pan Brothers’ concentrated ownership by Ludijanto Setijo and Anne Patricia Sutanto, who hold president and vice president positions respectively on the board of directors, and show an effective ownership of 22.88 percent and 9.09 percent respectively in the company.

These governance concerns are partially balanced by the presence of two independent – out of three – members on its Board of Commissioners, and a track record of a prudent dividend policy and strong shareholder support.

Given the negative ratings outlook, Moody’s will unlikely upgrade Pan Brothers’ ratings over the next 12 – 18 months. Nevertheless, the ratings outlook could return to stable, if the company successfully refinances its $138.5 million revolving credit facility due February 2021, and maintains solid operating performance and profitability.

Moody’s could downgrade the ratings if Pan Brothers’ financial and liquidity profiles weaken further owing to the company’ inability to proactively address the refinancing of its $138.5 million revolving credit facility due February 2021, higher than expected increase in working capital needs, which further pressure its liquidity profile or weaker revenue growth and deteriorating profitability, because of an industry downturn, intense competition or regulatory changes.

Pan Brothers is the largest listed manufacturer of garment products in Indonesia, with a total production capacity of 90 million pieces of garments per year at 30 September 2019. The company employs around 38,000 people across 12 production facilities in west and central Java.

The manufacturer generated approximately $656 million in revenue for the 12 months ended 30 September 2019.

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