Moody's Investors Service has downgraded the local textile producer, PT Sri Rejeki Isman Tbk also known Sritex (IDX: SRTX) corporate family rating from Ba3 to B1 - Photo by President Office

JAKARTA (TheInsiderStories) – Moody’s Investors Service has downgraded the local textile producer, PT Sri Rejeki Isman Tbk also known Sritex (IDX: SRTX) corporate family rating from Ba3 to B1, the agency reported today. The outlook remains negative.

In addition, Moody’s also downgraded the ratings on the $150 million senior unsecured notes due in 2024 to B1 from earlier Ba3, issued by Golden Legacy, and unconditionally and irrevocably guaranteed by the manufacturer and the units . The $225 million senior unsecured notes due in 2025 issued by Sritex and unconditionally and irrevocably guaranteed by all its operating subsidiaries also lowered.

“The downgrade primarily reflects Sritex‘ weakened liquidity position and debt structure, amid its growing reliance on short-term funding to support meaningful working capital and other operational requirements. Continued challenging conditions in the producer’ end-markets will likely hamper the pace of any working capital release,” says Stephanie Cheong, the analyst from Moody’s.

She added, “Continued challenging conditions in Sritex’ end-markets will likely hamper the pace of any working capital release. The negative outlook reflects the building refinancing risks associated with Sritex’s$350 million syndicated loan maturing January 2022 amid difficult market conditions,”

Sritex has had to increase its inventories through 2020 in anticipation of raw material supply disruptions and higher demand volatility. The textile company has also allowed longer payment terms for key customers to support order flows. As a result, the coampny’ cash conversion cycle lengthened considerably to 241 days as of Sept. 30, 2020 from an average of 177 days over the last five years.

These actions have also resulted in around $154 million of cash outflow over the nine months, which has so far been wholly funded with short-term working capital facilities. Moody’s does not expect the impact of these measures to be permanent, and the company is committed to improving its working capital management in 2021.

Nevertheless, continued challenges in the global retail markets will test its ability to free up working capital. Sritex‘ elevated working capital needs will in the meantime continue to weigh on cash flow generation, resulting in continued high reliance on short-term working capital facilities.

As of end September, the issuer had access to around $240 million of undrawn committed working capital lines. However, most of these working capital lines will come due for renewal through 2021. The manufacturer has rolled over most working capital debt maturing in 2020, with a small number of facilities under temporary extension while formal renewal is underway.

As such, Moody’s expects that Sritex will be able to maintain access to substantially all of its working capital facilities. Any deviation from this expectation will result in material rating pressure. Its liquidity is weak and facing building exposure due to its large $350 million syndicated loan maturing in January 2022.

While the company’ substantial cash holdings of $159 million at Sept. 30 and access to $87 million of committed bank lines maturing beyond 2021 will be sufficient to cover around $55 million of maintenance capex, the $65 million medium-term notes due in the fourth quarter and second quarter of 2021.

Then, $15 million of debt amortization payments, it will not be sufficient to cover Sritex’s $350 million syndicated loan maturing in January 2022.  Furthermore, Moody’s base case assumes the $174 million outstanding under Sritex‘ short-term working capital lines will continue to be rolled over as it comes due.

As such, in the absence of other counter-measures, Sritex is reliant on short-term external funding to meet its upcoming long-term debt obligations. The producer on Nov. 2 submitted a request to its lenders for a two-year extension on its $350 million syndicated loan maturing January 2022. Its lenders have 90 days until Feb. 1, 2021 to respond if they are willing to extend.

There is no minimum acceptance amount and lenders who are not willing to extend will need to be repaid by the original January 2022 maturity date. To maintain its current rating, Sritex will need to demonstrate continued access to financing through the extension of most of its loans, and/or secure concrete alternative funding.

The B1 rating continues to reflect its vertically integrated operations and leading market position among Indonesian textile manufacturers. The rating also incorporates governance risk arising from the company’ concentrated ownership structure and related party transactions.

Sri Rejeki Isman based in Central Java, is a vertically integrated manufacturer of yarn, raw fabric, finished fabric and apparel, including uniforms and retail clothing. The company’ operations are spread across 25 factories, consisting of nine spinning plants, three weaving plants, five finishing plants and eight garment plants.

Net revenue generated by the company’s four divisions amounted to around $1.2 billion in 2019. Sritex is majority owned by the Lukminto family (60.11 percent). Iwan Setiawan Lukminto, the son of founder H.M Lukminto, has been the company’ president director since 2006.

The family oversees the day-to-day operations. The remaining 39.89 percent share of Sritex is publicly traded on the Indonesian Stock Exchange.

Edited by Editorial Staff, Email: theinsiderstories@gmail.com