Oil Tanker - Photo by PT Buana Listya Tama Tbk

JAKARTA (TheInsiderStories) – Moody’s Investors Service has assigned a first-time B1 corporate family rating (CFR) to PT Buana Lintas Lautan Tbk (IDX: BULL). At the same time, Moody’s has assigned a B1 rating to the proposed United States dollar senior unsecured notes to be issued by BULL Maritime Capital Pte. Ltd., a wholly owned subsidiary of BULL.

It says the outlook on the ratings is stable. The proceeds from the issuance of the notes will be used to repay all outstanding debt, acquire vessels, fund the interest service account and pay transaction fees. The notes will be guaranteed by BULL and
substantially all its subsidiaries on a senior unsecured basis.

Rating Rationale

Moody’s Analyst, Maisam Hasnain, says that BULL’s B1 CFR reflects its solid business profile, underpinned by time charter contracts which provide good revenue visibility and strong profitability. The rating is also supported by barriers to competition, based in turn on favorable industry regulations, particularly the cabotage laws, which mandate the use of Indonesia-flagged vessels for domestic sea freight transportation.

“Nonetheless, BULL’s B1 CFR also takes into account its small scale of operations relative to other rated shipping companies, its sizeable capital spending plans which will raise execution risk, and its heavy reliance on a single counterparty, namely PT Pertamina (Baa2 stable)” adds Hasnain, also Moody’s Lead Analyst for BULL.

On the back of the growing consumption of oil and gas in Indonesia, BULL has grown from operating nine vessels with a capacity of 384,915 deadweight tons (DWT) in 2015 to 19 vessels with 923,074 DWT as of 31 March 2019.

Furthermore, as of March 2019, around 91 percent of its fleet were – in DWT terms – on time charter contracts. Given the high proportion of such contracts, Moody’s expects BULL’s vessel utilization rates to remain high and revenue to be predictable over the next two to three years.

Despite its growth in recent years, BULL has sought to maintain conservative financial policies, funding its growth with an appropriate mix of debt and equity. In addition to using the proceeds from the issuance of its proposed notes to acquire additional vessels, BULL plans to complete an Rp600 billion rights issue by June, which would be its third rights issue in three years.

Although Moody’s estimates BULL’s leverage – as measured by Moody’s adjusted debt/EBITDA – will peak at around 4.0x in 2019 following the proposed notes issuance, leverage will subsequently decline to 3.0x – 3.2x in 2020 based on the earnings growth from its new vessels. Such leverage levels are supportive of their B1 rating.

As of 31 March 2019, around 90 percent of BULL’s fleet by DWT capacity was on time charter contracts with the state-owned oil and gas company, PT Pertamina (Baa2 stable) and its associates. While this results in considerable counterparty risk, the situation is balanced against BULL’s longstanding relationship with Pertamina of around 38 years with an established track record of time charter contract renewals.

Furthermore, Moody’s notes that as BULL’s scale is smaller than rated peers, its operating performance remains susceptible to changes in charter rates or unanticipated operating costs. However, the company has thus far managed these risks.

As the planned proceeds will be used to repay all of BULL’s existing debt, the proposed US dollar notes are rated in line with BULL’s CFR. The presence of upstream guarantees from substantially all subsidiaries also mitigates structural subordination risk for bondholders.

The stable outlook is based on Moody’s expectation that BULL will maintain revenue visibility from its time charter contracts, while also maintaining its strong relationship with Pertamina, and will adhere to its prudent stated financial policies as it grows its business.

An upgrade is unlikely over the next 12-18 months, given the company’s scale and sizeable capital spending plan. However, upward rating pressure could develop over time if management continues to successfully grow its business while improving the company’s credit metrics, and the domestic regulatory environment remains benign.

Credit metrics indicative of a rating upgrade include adjusted debt/EBITDA of below 3.0x and adjusted (FFO + interest expense) or interest expense over 4.0x on a sustained basis.

The rating could be downgraded if: earnings growth from the ongoing vessel purchases do not materialize; industry fundamentals weaken, resulting in lower charter rates or an inability by BULL to renew expiring charter contracts; or BULL deviates from its stated prudent financial policies.

Credit metrics indicative of a rating downgrade include adjusted debt/EBITDA above 4.5x and adjusted (FFO + interest expense) or interest expense below 2.5x on a sustained basis.

Furthermore, downward rating pressure will build if: any legislative development arises that would loosen cabotage laws, or Pertamina materially shifts management of its fleet such that it reduces its exposure to BULL.

The principal methodology used in these ratings was Shipping Industry published in December 2017. Headquartered in Jakarta, and founded in 2005, BULL provides shipping services primarily to oil and gas companies, including PT Pertamina (Baa2 stable) and its associates. BULL operated a fleet of 19 vessels as of March 2019.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com