JAKARTA (TheInsiderStories) – Moody’s Investor Service affirmed corporate family rating of publicly listed textile producers, PT Sri Rejeki Isman Tbk or Sritex (IDX: SRIL) rating at Ba3. Otherwise, the agency downgraded other producer, PT Pan Brothers Tbk (IDX: PBRX) to B2 from B1.

Moody’s also maintained the Ba3 ratings on the US$150 million senior unsecured notes due in 2024, issued by Golden Legacy Pte. Ltd. and unconditionally and irrevocably guaranteed by Sritex and its subsidiaries.

Its also kept the $225 million senior unsecured notes due in 2025, issued by Sritex and unconditionally and irrevocably guaranteed by all its operating subsidiaries at same level. Moody’s has also revised the outlook on these ratings to negative from stable.

“The negative outlook reflects our expectation that diminished consumer spending on apparel and footwear globally as a result of the coronavirus outbreak will reduce Sritex’s earnings and increase its working capital needs through 2020,” says Stephanie Cheong, a Moody’s Analyst.

The rapid and widening spread of the COVID-19, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. Sritex and Pan Brothers is exposed to the retail industry which has been significantly affected by the shock given its sensitivity to demand and sentiment.

“In our view, Sritex’ products like yarn and greige, which make up half of its total revenues, are particularly vulnerable as their sales not under committed contracts and could fall away quickly in case of prolonged lockdowns across the world,” adds by Cheong.

Sritex‘ garment sales should be largely stable as the company is able to pivot its garment production to other revenue channels, such as the production of masks and medical jumpsuits, which should offset expected declines in its apparel sales.

The producer’ large cash balance of $168 million at the end of 2019, along with around $102 million of availability under committed credit facilities, will be more than sufficient to cover its upcoming $116 million of debt maturities in 2020. These include $30 million and $10 million of medium term notes due in November and December 2020

In addition, $8 million of scheduled debt repayments and $68 million of short-term working capital loans which Sritex plans to rollover. The company’ Ba3 rating continues to reflect its vertically integrated operations and leading market position among Indonesian textile manufacturers.

The ratings also incorporate governance risk arising from the company’s concentrated ownership structure and related party transactions.

At the same time, Moody’s has downgraded the senior unsecured rating on the 2022 notes issued by a wholly owned subsidiary of Pan Brothers, PB International B.V., and guaranteed by Pan Brothers and all its subsidiaries to B2 from B1. The outlook on the ratings remains negative.

“The downgrade reflects the heightened refinancing risk associated with Pan Brothers’ core $138.5 million revolving credit facility due February 2021, and our assessment that the company’s liquidity headroom has narrowed materially. We expect Pan Brothers will have little liquidity buffer to withstand any deterioration in earnings or unexpected stretches in its working capital, and this presents a significant challenge even under its new B2 rating,” says Cheong.

At Sept. 30, Pan Brothers had a cash balance of $64 million and $36.5 million available under its core $138.5 million revolving credit facility, which Moody’s believes to be largely drawn as of the end of March 2020. The company’ business is seasonal in nature and working capital tends to peak in the first half of the year, leading to negative cash from operations and increased dependence on its revolving credit facility, which will mature in less than a year.

While, working capital typically unwinds in the second half of the year, delays in orders or customer receivables, exacerbated by the coronavirus outbreak, will stretch working capital and temper cash flow generation. This in turn will likely require by the producer to fully draw down its revolving credit facility and eat into its cash cushion, putting further stress on its liquidity.

Pan Brothers has longstanding relationships with major global apparel retailers who have strong market positions and well recognized brand names, it is uncertain how the pressure from a severe drop in consumer spending will be distributed along the value chain of retailers, distributors and suppliers like Pan Brothers.

That said, Moody’s base case assumes that Pan Brothers’ revenue in 2020 will remain relatively flat, as the company’s ability to pivot its production to other revenue channels, such as the production of masks and medical jumpsuits, should offset expected declines in its fashion apparel sales.

However, higher debt levels as a result of increased working capital needs will weaken debt to EBITDA and EBITDA on interest expense to 5.1x and 1.9x respectively in 2020. The negative outlook reflects the refinancing risk associated with Pan Brothers‘ $138.5 million revolving credit facility.

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.

Its competitor Sritex, also based in Central Java, is a vertically integrated manufacturer of yarn, raw fabric, finished fabric and apparel, including uniforms and retail clothing. The company’ operations are spread across 25 factories, consisting of nine spinning plants, three weaving plants, five finishing plants and eight garment plants. Net revenue generated by the company’s four divisions amounted to around $1.2 billion in 2019.

The company is majority owned by the Lukminto family (60.11 percent). Iwan Setiawan Lukminto, son of founder H.M Lukminto, has been the company’ president director since 2006. The family overseas the day-to-day control of operations. The remaining 39.89 percent share of the company is publicly traded on the Indonesian Stock Exchange.

Edited by Staff Editor, Email: theinsiderstories@gmail.com