JAKARTA (TheInsiderStories) – Moody’s Investor Service downgraded two state-owned enterprises rating due to negative impact from the COVID-19 Outbreak. The agency has downgraded the issuer and senior unsecured ratings of PT Jasa Marga Tbk (IDX: JSMR) to Baa3 from Baa2 with outlook remains negative and PT Wijaya Karya Tbk (IDX: WIKA) from Ba3 to Ba2 also with outlook negative.
The downgrade of Jasa Marga’ ratings reflects in Moody’s expectation of support from the government (Baa2 stable) to the toll road operator in times of need, reflecting its important role of developing road infrastructure. The one-notch reduction considers the government’ increasingly selective approach towards supporting the state owned enterprises (SOEs) given its current fiscal position, and its comparatively lower strategic importance than other higher rated and more critical SOEs.
The negative outlook continues to reflect the company’ exposure to the credit risks associated with the continued negative impact of the virus outbreak on revenue. Moody’s expects the contraction in traffic volumes on Jasa Marga’ toll roads will weaken its cash-flow generation in 2020. Although the government has further eased social distancing measures, there is limited visibility on the subsequent recovery in Indonesian toll road volumes because of the unprecedented nature of the coronavirus outbreak.
The weaknesses in Jasa Marga’ financial profile have left it vulnerable to demand shifts under the current operating conditions. The company’ credit profile is reliant on prospective traffic growth for its toll roads in development or ramping up to strengthen its financial profile to pre-coronavirus levels.
Although it is seeking to reduce operating and capital expenditures in response to the pandemic, there may be limited opportunities to materially reduce capital expenditure in 2020. Jasa Marga is in discussions with bank lenders to reprofile bank debt servicing requirements to better align with cash flow at both the holding company and project levels during these uncertain times.
Moody’s understands from the company that these amendments to its bank loans are not aimed at avoiding default and that bank lenders have not suffered economic losses as a result of such actions. Jasa Marga continues to enjoy local bank and capital markets access, with successive drawdowns on liquidity facilities and local bonds continuing to trade near or above par value. The company is not engaged in any debt restructuring related to capital market instruments.
Recent regulatory actions amid the ongoing uncertainties associated with the coronavirus outbreak are also credit negative for Jasa Marga. Tariff adjustments for a number of its toll roads have been postponed. While the company is eligible for compensation for this delay, uncertainty remains around the form, amount and timing of the compensation.
Notwithstanding the more challenging operating environment in 2020, demand for Jasa Marga’ toll roads has historically been resilient, given continued economic growth and the favorable demographics of a growing middle class. Its liquidity in the coming 12 to 18 months is weak due to the negative cash flow impact of the coronavirus and committed capital expenditure payments.
The company also announced dividend payments amounting to around 5 percent of the previous year’ net profit, down from 15 percent the year before. The company also has Rp4 trillion (US$285.71 million) of Komodo bonds coming due on 11 December 2020.
As of the end of May 2020, Jasa Marga had approximately Rp2.8 trillion of cash on its balance sheet. Liquidity is supplemented by Rp24.4 trillion in undrawn committed credit facilities, of which Rp4.4 trillion expires over the next 12 months.
Jasa Marga is in talks with local banks to extend expiring facilities as well as to obtain more committed liquidity facilities. In addition, the company is assessing initiatives aimed at reducing its cost base and optimizing its investment spend, with the objective of further supporting its liquidity profile.
Given the reduction in earnings stemming from the more challenging operating environment, Moody’s expects that Jasa Marga will need to provide support to some of its subsidiaries or investments with project-level debt to avoid covenant breaches for such debt. The liquidity requirements are uncertain and are dependent on the extent of traffic declines and project-level financial reserves available.
Currently, one of Jasa Marga’ subsidiaries has a pre-existing covenant breach that is technical in nature and related to the financial covenants. Banks have waived the breach for 2019, and Moody’s is awaiting documentation on the waiver for 2020 and amendment to its financial covenants, which will prevent further breaches.
WIKA’ business has been severely impacted by the coronavirus pandemic, and we expect the supply chain disruptions and restrictions on construction work resulting from the lockdowns in Indonesia will delay the completion of all of its projects. Consequently, we expect its leverage to peak to 9.0x – 10.0x in 2020 and remain elevated at about 5.8x – 6.0x through 2022.
Furthermore, the strong growth in new contracts in recent years has corresponded with a weakening in WIKA’s credit metrics given the large up-front investments associated with some of these projects. Moody’s expects the company to generate negative cash from operations over 2020 and 2021 given its size-able working capital requirements.
The negative outlook reflects WIKA’s elevated leverage and weak liquidity amid an uncertain operating environment due to the protracted virus outbreak. The company will also need to refinance debt maturities of Rp5.6 trillion over the next six months, which include the Komodo bond maturing in January 2021. Moody’s expects WIKA will continue to have access to domestic state-owned banks.
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The construction sector has been affected by the shock given its direct exposure to government containment and regulatory measures, and its sensitivity to consumer demand and sentiment.
WIKA’ standalone credit profile continues to reflect its leading market position as one of the largest integrated construction companies in Indonesia with an established track record of completing large projects, and a strong order book which provides revenue and cash flow visibility over the next few years.
WIKA’ order book declined to Rp80.2 trillion as of March 2020 (compared to IDR117 trillion in December 2019), and comprised mainly of backlog orders. Based on revenues for the 12 months to March 2020, this represents an order book to revenue ratio of around 3.2x, down from 3.6x in 2015.
Moody’s expects WIKA’ order book to revenue ratio to remain around 3.5x – 4.0x through 2021 and 2022 on the back of a pick-up in infrastructure investment as Indonesia emerges from coronavirus-led lockdowns.
In addition, its earnings growth over the next two years will be driven by its three largest projects–the Jakarta to Bandung High Speed Rail, Jakarta Light Rail Transit, and Balikpapan – Samarinda Toll Road–which constituted around 27 percent of WIKA’ order book as of March 2020. As such, project delays or cost overruns could adversely impact its credit profile.
Moody’ expectation of support from the Indonesian government for WIKA stems from the company role in achieving Indonesia’ infrastructure development objectives as one of the four main state-owned construction companies. Such expectation of support remains appropriately reflected in the two notches of uplift.
The negative outlook reflects WIKA’ elevated leverage and weak liquidity amid an uncertain operating environment due to the protracted coronavirus outbreak. The company will need to refinance significant debt maturities over the next six months.
Established in 1960, WIKA is one of the largest engineering, procurement and construction companies in Indonesia with a revenue of Rp24.9 trillion for the 12 months ended March 2020 and an order book of Rp80.2 trillion as of March 2020.
WIKA was listed on the Indonesian Stock Exchange in 2007 and is 65 percent owned by the government, with the remaining 35 percent of shares held by the public. While, Jasa Marga is currently 70 percent owned by the government since and become a public company in 2007.
As of December 2019, the company operated 1,168 kilometers (km) of toll roads across various parts of Indonesia, or 55 percent of all toll roads by length in operation. In terms of total toll road concessions, it has the right to build, own and operate around 1,527 km of toll roads in total. The Indonesian Toll Road Authority (BPJT) is the regulator for the industry and the concession counter party for Jasa Marga.
Ray Tay and Nidhi Dhruv from Moody’s Investor Services