Singapore — Moody’s Investors Service has assigned a first-time B2 corporate family rating (CFR) to Sulfindo Adiusaha (P.T.).
At the same time, Moody’s has assigned a B2 rating to the proposed senior
unsecured notes due 2023. The notes will be issued by Sulfindo and
guaranteed by its 95%-owned subsidiary, Merak Energi Indonesia (P.T.)
The ratings outlook is stable. Proceeds of the notes issuance will be primarily used to repay existing debt, fund capital expenditures and for other general corporate purposes.
“Sulfindo’s B2 CFR reflects its established market position in the Indonesian chlor-alkali and polyvinyl chloride (PVC) industries, low cost operations, and improved operating performance,” says Brian Grieser, a Moody’s Vice President and Senior Credit Officer.
Sulfindo is a commodity-chemical producer and distributor of caustic soda, ethylene dichloride (EDC) and PVC, which accounted for approximately 45%, 25% and 29% of revenue during the nine months ended 30 September 2017. The balance of sales are from hydrochloric acid and sodium hypochloride.
The B2 CFR reflects Moody’s expectation that the proposed refinancing will materially reduce Sulfindo’s dependence on short term funding, by eliminating loan amortization payments, and enable prospective compliance with financial maintenance covenants in its working capital facilities.
The CFR is also constrained by Sulfindo’s exposure to earnings and cash flow volatility given the commodity nature of its raw materials, which include ethylene, coal, salt and water, and its final products. Combined, Moody’s estimates that ethylene and electricity accounted for about 72% of cost of goods sold in 2017, including the cost of Sulfindo’s captive power generation.
This exposure to volatile raw material costs is somewhat mitigated by the
companies operation of a captive 2x 60MW coal fired power plant in Merak,
Indonesia (Baa3 positive), the integrated pipeline with Chandra Asri Petrochemical Tbk (P.T.) (Ba3 stable) which allows for the low cost delivery of ethylene and the close proximity of key customers which reduces logistic costs.
Moody’s expects that Sulfindo will maintain adjusted financial leverage of around 4.0x-4.5x in 2018; which is consistent with the B2 ratings. We expect the company to maintain EBITDA margins between 16% to 19% over the next 12 months benefitting from improved prices for its caustic soda and
PVC and the likely growth in end-market demand in 2018 and 2019.
The B2 rating on the proposed senior unsecured notes reflect Moody’s
expectation that the new notes will represent the large majority in the post–refinancing capital structure.
The stable outlook reflects Moody’s view that the recent improvement in
Sulfindo’s operating performance, highlighted by improved EBITDA margins
and cash flows in 2017, is sustainable in 2018 and 2019. The outlook also incorporates Moody’s expectation that Sulfindo will be free cash flow positive in 2018 and will allocate cash to debt reduction, thereby reducing its reliance on short term funding.
The ratings could be downgraded if the company fails to address its high
level of debt maturities in 2018 and 2019 in a timely manner. Further, the rating could also be downgraded, if the company were to begin paying dividends or make large debt funded acquisitions such that the company’s
credit metrics deteriorate. Credit metrics indicative of downward pressure on the ratings include adjusted debt/EBITDA exceeding 5.0x for an extended period.
An upgrade is unlikely at this time given the company’s exposure to the
commodity chemical cycle, small scale, track record of debt restructurings and its weak liquidity profile. A ratings upgrade would require adjusted debt/EBITDA to be maintained below 3.0x for an extended period.
Sulfindo Adiusaha (P.T.) is a fully integrated chlor-alkali and PVC producer in Indonesia. Sulfindo’s plants are located at a 28 hectare site in Merak, Indonesia and includes plants for the production of caustic soda and chlorine, ethylene dichloride (EDC), vinyl chloride monomer (VCM) and PVC.
Sulfindo is owned by entities controlled by Debora Wahjutirto Tanoyo. The
company has been owned and controlled by Ms. Tanoyo’s family since 2001.