JAKARTA (TheInsiderStories) – Moody’s Investors Service has assigned a Baa2 rating to the proposed senior unsecured USD notes to be issued by Pertamina (Persero) (P.T.). The rating outlook is stable.
The notes will be issued under Pertamina’s US$10 billion global medium term note program, which is rated (P)Baa2.
Pertamina plans to use the proceeds to finance the tender offer for its outstanding $1 billion 5.25% senior notes due 2021 and $1.25 billion 4.875% senior notes due 2022. The remaining proceeds will be used for capital expenditures and general corporate purposes.
Pertamina Baa2 issuer rating primarily reflects its standalone credit quality, as captured in its baa3 baseline credit assessment (BCA).
“Pertamina’s baa3 BCA reflects its integrated oil and gas operations, significant upstream production and hydrocarbon reserves, as well as large-scale downstream business with substantially full control of Indonesia’s refineries, fuel marketing stations and gas pipelines,” says Rachel Chua, a Moody’s Assistant Vice President and Analyst.
At the same time, Pertamina’s strengths are balanced by its exposure to an evolving and unpredictable regulatory environment in Indonesia, weaker profitability as it absorbs the country’s fuel subsidy burden and a high degree of execution risk associated with its sizable investment plan.
“The rating also incorporates our expectation of higher leverage over the next two years owing to company’s large capex program, increased working capital needs in this higher oil price environment and downstream losses as it continues to absorb the country’s fuel subsidy burden,” adds Chua, who is also Moody’s Lead Analyst for Pertamina.
Moody’s expect Pertamina’s retained cash flow-to-net-debt will weaken to 22%-25% over the next two years from 51.2% in 2017, but remain within the parameters of its rating.
The Baa2 issuer rating incorporates Moody’s expectation of the very high likelihood of extraordinary support from the Government of Indonesia (Baa2 stable) and very high inter-dependence between the two.
Moody’s support assessment reflects Pertamina’s strategic importance given its important role in oil and gas exploration, petroleum product distribution and gas distribution in the country, as well as the government’s close supervision of its strategies and budget.
The outlook on Pertamina’s ratings is stable, reflecting the stable outlook of Indonesia’s sovereign rating, as well as Moody’s expectation that Pertamina will manage its capital expenditure program such that its financial metrics will remain supportive of its BCA.
Moody’s will upgrade Pertamina’s Baa2 issuer rating if (1) the Indonesian government’s Baa2 rating is upgraded, (2) its BCA is at least maintained at the current baa3 level and (3) the support assessment incorporated in the rating remains unchanged.
An upgrade of BCA alone will not result in Pertamina’s rating upgrade.
Moody’s will consider raising Pertamina’s BCA to baa2 if it (1) establishes a track record of increasing petroleum product prices in a rising oil price environment, which will demonstrate the resilience of its downstream earnings; and (2) demonstrates sustained improvements in its credit profile and maintains financial discipline as it pursues growth.
Credit metrics indicative of an improvement in Pertamina’s BCA include retained cash flow (RCF)/net debt exceeding 25%-30%, adjusted debt/capital below 45%-50% and EBITDA/interest exceeding 6x, all on a sustained basis.
Pertamina’s issuer rating may face downward pressure if (1) Indonesia’s sovereign rating is lowered; (2) the company’s BCA falls below ba2; or (3) the government ownership at Pertamina is reduced, or the government control is reduced by some other means, which would require a reassessment of the level of support incorporated into its ratings.
Downward pressure on Pertamina’s BCA could develop if its credit metrics deteriorate as a result of (1) changes in the fuel pricing framework that result in a substantial erosion of the company’s earnings; or (2) a large debt-funded expansion, acquisitions or dividend payments; or (3) a sustained decline in margins or efficiency of operations.
Credit metrics indicative of deterioration of its BCA to ba1 include RCF/net debt below 20%, adjusted debt/capital above 55% or EBITDA/interest below 5x.
Pertamina (Persero) (P.T.) is a 100% Indonesian government-owned, fully-integrated oil and gas corporation, with operations in upstream oil, gas and geothermal exploration and production, downstream oil refining, marketing, distribution, transportation and trading of petroleum products.