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Rating Action:

Moody's affirms Soechi's B2 rating, downgrades bond rating to B3; outlook stable

10 Dec 2020

Singapore, December 10, 2020 -- Moody's Investors Service has affirmed Soechi Lines Tbk. (P.T.)'s B2 corporate family rating (CFR).

At the same time, Moody's has downgraded to B3 from B2 the senior unsecured rating on the $200 million notes issued by Soechi Capital Pte. Ltd., a wholly owned subsidiary of Soechi.

The outlook has been changed to stable from negative.

The rating actions follow Soechi's announcement on 9 December 2020 that it will buy back $123 million of its $200 million US dollar notes due January 2023 at a price of $700 per $1,000 principal issued. The buyback will be funded by a new $180 million 7-year amortizing secured term loan, which will also be used to fully repay its $77 million term loan due August 2021.

"The rating affirmation reflects Soechi's improved liquidity profile and slightly lower debt levels following its successful refinancing exercise, as well as the earnings stability provided by its shipping business thanks to the use of time charters," says Stephanie Cheong, a Moody's Analyst.

"The downgrade of the bond rating to B3 reflects the subordination of the remaining $78 million of its unsecured 2023 bonds relative to around $220 million of secured debt in Soechi's capital structure," adds Cheong, who is also Moody's Lead Analyst for Soechi.

RATINGS RATIONALE

Soechi's bond tender will reduce its overall debt levels by $37 million, thereby improving leverage, as measured by debt/EBITDA, to 5.1x from 5.7x as at 30 September 2020. Moody's expects Soechi's leverage will be elevated at 4.8x-5.3x over the next 12-18 months due to weaker earnings, but remain within its B2 rating threshold.

Moody's expects Soechi's shipyard business to continue generating operating losses through 2020-21, weighing on overall profitability, as the company struggles to replenish its order book with profitable orders amid the coronavirus outbreak. However, Moody's does not expect operating losses to widen beyond 2020 as the company continues to execute cost cutting measures at its shipyard.

Soechi Lines's B2 rating is underpinned by its relatively high degree of revenue visibility, with around 90% of shipping revenue supported by time charter contracts, the majority of which are with Indonesia's state-owned oil and gas company, Pertamina (Persero) (P.T.) (Baa2 stable). The rating also reflects the high barriers to entry created by cabotage laws in Indonesia, which mandate the use of Indonesian-flagged vessels for domestic sea freight transportation.

Moody's expects shipping revenues to remain muted over the next 12-18 months, as higher dry docking days will reduce revenues slightly in 2020 and poor domestic demand for fuel could potentially hinder the timely renewal of Soechi's time charter contracts.

The rating also remains constrained by the relatively small scale of Soechi's operations compared to its global peers, and by its significant reliance on two very large crude carriers (VLCC), which account for 40% of the fleet's dead weight tonnage.

Moody's expects the company's liquidity to be adequate over the next 12-18 months, with its cash balance and estimated positive free cash flows sufficient to cover its debt amortization payments. Soechi's successful refinancing has extended its debt maturity profile and alleviated near-term refinancing risk, with the next major maturity being the remaining $78 million bonds in January 2023. However, Soechi's financial flexibility will henceforth be limited as its entire vessel fleet will become encumbered under its secured bank loans.

The remaining $78 million of Soechi's unsecured 2023 bonds are rated one notch below the CFR because they will make up around 25% of Soechi's new capital structure and will have to contend with secured bank debt, which has a priority claim and ranks ahead of the bonds, thereby reducing recoveries in the event of a potential default.

The stable outlook reflects Moody's expectation that Soechi will maintain its longstanding relationship with Pertamina and preserve its good revenue visibility through its continued use of time charter contracts. The outlook also takes into account the risks arising from the formative stage of its shipbuilding business and expectations that operating losses will not widen materially beyond 2020.

In terms of environmental, social and governance (ESG) factors, Moody's has considered the governance risk stemming from Soechi's concentrated ownership by the Utomo family, who own around 85% of the company. These governance concerns are partially balanced by Soechi's listed status and improving financial policies, including a reduction in debt-funded growth since last year.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The rating could be upgraded if management continues to successfully grow the shipping business and increase the profit contribution from its shipyard business while lowering leverage. Given Soechi's small scale and customer and vessel concentration, Moody's would expect leverage, as measured by debt-to-EBITDA, to be around 4.0x on a sustained basis and interest coverage above 2.25x.

Furthermore, an upgrade is unlikely before its shipyard business develops a track record of executing orders in a timely and profitable manner while sustaining a modest order backlog.

The rating could be downgraded if (1) industry fundamentals weaken, resulting in lower charter rates or an inability to renew expiring charter contracts; (2) operating losses at Soechi's shipyard do not moderate as expected over the next 12-18 months; (3) we believe that Soechi does not have ample liquidity to fund its operations and meet debt amortization payments; (4) there are adverse changes in cabotage laws; (5) Pertamina shifts management of its fleet, such that it materially reduces its exposure to Soechi; or (6) Soechi undertakes material debt-funded capital spending or shareholder returns.

Specific indicators Moody's would consider for a downgrade include adjusted debt/EBITDA above 5.5x or adjusted (FFO + interest expense)/interest expense below 2.0x.

The principal methodology used in these ratings was Shipping Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243200. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jakarta, Indonesia, Soechi Lines Tbk. (P.T.) provides shipping services primarily to oil and gas companies, including Pertamina (Persero) (P.T.) and its associates. Soechi also operates a ship-building and maintenance business through its 99.99% subsidiary PT Multi Ocean Shipyard.

Soechi is a family owned business with the members of the Utomo family holding an approximate 85% stake and the public the remaining 15%.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephanie Cheong
Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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