Moody’s assigns first-time B2 CFR to Spindo; outlook stable

Photo by Spindo

Singapore, September 01, 2017 — Moody’s Investors Service has assigned a
first-time B2 corporate family rating (CFR) to Steel Pipe Industry of
Indonesia Tbk (P.T.) (Spindo).

At the same time, Moody’s has assigned a B2 rating to the proposed senior
notes due 2022. The notes will be issued by Spindo’s wholly owned subsidiary, Spindo B.V., and guaranteed by Spindo and its 90% owned subsidiary, PT Spindo Engineering Industry, which together own
substantially all assets of Spindo.

The ratings outlook is stable.

Proceeds of the notes issuance will be primarily used to repay existing


“The B2 CFR reflects Spindo’s leading market position in the Indonesian
steel pipe manufacturing industry, solid end-market diversification, and
success in passing steel price volatility to customers; thereby
supporting solid EBITDA margins of between 15% and 19% in recent years,”
says Brian Grieser, a Moody’s Vice President and Senior Credit Officer.

“The B2 CFR also reflects Spindo’s small scale relative to rating peers,
high working capital investment needs, volatility in quarterly gross
margins, and exposure to global and domestic steel price fluctuations,”
adds Grieser.

While Spindo’s quarterly gross margins can be volatile, its cost plus
pricing model is effective in stabilizing its margins when viewed over a
longer timeframe, such as 12 months.

Moody’s expects that Spindo’s debt-to-EBITDA will range between 4.0x and
5.0x over the next two years; which is commensurate with a B2 CFR.

The CFR incorporates Moody’s view that Spindo will maintain low cash
balances, and as such will likely rely on a portion of its $100 million
in short-term bank credit facilities to manage its interim working
capital needs in 2017 and 2018.

In 2016, inventory days on hand increased to around 350, as
infrastructure sales growth did not materialize to levels projected by
management, resulting in negative cash flow from operations for the
second time in the last four years.

While Moody’s expects that working capital needs will intermittently
pressure cash flows, Moody’s anticipates that capital expenditures will
fall in 2017 and 2018, which should alleviate these pressures on cash
flow generation. Capital expenditures will be allocated largely to the
construction of warehouses to expand Spindo’s direct sales reach in
Indonesia (Baa3 positive).

Spindo manufactures carbon and stainless steel pipes used in the
construction, infrastructure, utilities, oil and gas, furniture and
automotive industries. While sales to the oil and gas sector deteriorated
in recent years — as oil prices and investment in the industry fell —
Spindo’s sales were resilient due to the strength of growth in its other
end markets; highlighting the benefits of its end market diversification.

Moody’s views Spindo’s leading market position as defensible, given its
scale, brand recognition, and broad customer base when compared to
Indonesian competitors. High barriers to entry for foreign competitors —
such as local content requirements on government contracts and higher
shipping costs — also protect Spindo’s market position.

The stable ratings outlook reflects Moody’s expectation that Spindo will
successfully manage down inventory levels from 2016 highs and continue to
generate solid profitability levels, despite fluctuations in steel
prices. The stable outlook also reflects Moody’s expectation of improved
demand, in line with GDP growth in Indonesia, as well as increasing
infrastructure investments in 2017 and 2018.

The B2 rating on the backed senior unsecured notes factors in Moody’s
expectation that these notes will represent the large majority of debt
in Spindo’s capital structure over the next 12-24 months.

The ratings could be upgraded if the company successfully expands its
warehouse infrastructure, while also improving inventory turnover
levels. Indicators of an upgrade include a situation in which Spindo: 1)
consistently generates positive cash flow from operations; 2) establishes
a track record of maintaining leverage levels such that its adjusted
debt-to-EBITDA falls below 4.0x; and 3) maintains EBITDA margins in the
high teens.

The ratings could be downgraded if inventory turnover levels weaken and/or
borrowings on the working capital facilities approach $100 million limit.

Moreover, persistently negative cash flow from operations, weakening
demand from key end markets, or leverage levels above 5.0x over an
extended period could also lead to a downgrade.

Steel Pipe Industry of Indonesia Tbk (P.T.) (Spindo) is a leading steel
pipe manufacturer in Indonesia, producing a variety of customized and
standardized carbon and stainless steel pipes and pipe-related products
and services. Spindo’s products are used by customers in the
construction, infrastructure, utilities, oil and gas, furniture and
automotive industries, and are sold under the Spindo and Tetsura brands.

Spindo operates six manufacturing facilities in Indonesia, with a total
of 37 steel pipe production lines.

The company listed on the Indonesia Stock Exchange in February 2013. It
is 55.94%-owned by PT. Cakra Bhakti Para Putra (unrated) and 44.06% owned
by public shareholders.