AKARTA (TheInsiderStories) - Moody’s Investors Service has assigned a Ba1 corporate family rating to PT Saka Energi Indonesia (Saka).
At the same time, Moody’s has assigned a Ba1 rating to proposed USD denominated bonds to be issued by Saka. The proceeds from the bonds will be used to refinance company’s bank loans and also for funding its capex.
This is the first time that Moody’s has assigned ratings to Saka Energi, a subsidiary of gas distributor PT Perusahaan Gas Negara Tbk (IDX:PGAS).
The outlook on the ratings is stable.
Rationale
“Saka’s Ba1 ratings incorporate a four-notch uplift, because of our expectation that the company will receive extraordinary support from its parent, PT Perusahaan Gas Negara (Persero) Tbk., in times of need,” says Vikas Halan, Moody’s Vice President and Senior Credit Officer.
Moody’s points out that PT Perusahaan Gas Negara (Persero) Tbk (PGN, Baa3 positive) owns a 100% stake in Saka.
Moody’s expectation of extraordinary support to Saka from PGN is based on Saka’s strategic importance to its parent, given that:
(1) Saka is PGN’s only upstream arm and is integral to PGN’s long-term vertical integration strategy;
(2) Saka is PGN’s largest subsidiary in terms of profit contribution and asset base;
(3) PGN has an established track record of providing financial support to Saka, providing equity funding and shareholder loans — amounting to $1.9 billion from 2013-2016 — for Saka’s investments totaling about $2.7 billion;
(4) PGN is exposed to reputational risk should Saka default; and
(5) A default by Saka on any of its obligations exceeding $50 million would be a default by PGN on its USD denominated bonds.
The rating incorporates expectation that the outstanding loan from PGN, which is currently scheduled for repayment in January 1 2021, will either be extended or converted to equity in line with the past track record.
“Saka’s standalone credit profile is constrained by its weak credit metrics, small production scale and limited reserves base,” adds Halan, who is also Moody’s Lead Analyst for Saka. “Saka is also exposed to high geographic and production concentration risk, with the Pangkah block contributing over 50% of its total revenue in 2016.”
Nevertheless, these risks are partly mitigated by the high revenue visibility of Saka’s long-term fixed-priced gas sales contracts with good quality counterparties. Saka’s credit profile is also supported by high production entitlements from its fields and declining operating costs.
Saka’s credit metrics remain weak for its standalone credit profile, with debt — including shareholder loans — to EBITDA of about 6.8x in 2016.
Saka’s credit metrics will improve over the next 1-2 years, on the back of increasing production volumes, thereby resulting in higher EBITDA levels.
The stable ratings outlook reflects Moody’s expectation that Saka will continue to receive financial support from its parent, and that its credit metrics will improve, as new fields — Sanga Sanga, Bangkanai, and Muara Bakau — come online in 2017 and 2018.
A ratings upgrade will require an improvement in Saka’s standalone credit profile, as well as an upgrade of PGN’s ratings. Saka’s ratings will remain at least a notch below that of PGN, in the absence of guarantees from PGN to Saka’s lenders.
Saka’s standalone credit profile will improve if the company performs better than Moody’s expects, or if a substantial portion of its loans from shareholders is either converted into equity or an instrument that has more equity like features.
Credit metrics indicative of an improvement in Saka’s standalone credit profile include a retained cash flow (RCF)/debt above 15%, and EBITDA/interest above 5x, both on a sustained basis.
Saka’s ratings could be downgraded if: 1) PGN’s ratings are downgraded; or 2) there is a change in the relationship between Saka and PGN, such as to lower Moody’s expectation of support from the parent to Saka.
Moody’s expectation of support from PGN to Saka could be lowered if PGN’s control over Saka diminishes, or there is a change in PGN’s long-term strategy that reduces Saka’s importance to PGN.
Saka’s ratings could also be downgraded if the company’s standalone credit profile deteriorates, as a result of a large debt-funded acquisition, or if the company experiences a delay in the ramp up of its production from its new fields.
Credit metrics indicative of a downgrade includes an RCF/debt below 10%, and EBITDA/ interest below 4x.
The principal methodology used in this rating was Global Independent Exploration and Production Industry published in December 2011. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. (*)