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Rating Action:

Moody's affirms Tunas Baru Lampung's Ba3 ratings; outlook stable

16 Apr 2019

Singapore, April 16, 2019 -- Moody's Investors Service has affirmed Tunas Baru Lampung Tbk (P.T.)'s (TBLA) Ba3 corporate family rating (CFR), along with the Ba3 rating on the backed senior unsecured bond issued by TBLA International Pte. Ltd., a wholly owned subsidiary of TBLA.

The outlook on the ratings is stable.

RATINGS RATIONALE

"The rating affirmation reflects our expectation that TBLA's credit metrics will remain appropriate for the rating over the next 12-18 months, supported by organic earnings growth and lower capital spending, which will reduce TBLA's need to incur incremental debt", says Maisam Hasnain, a Moody's analyst.

As a result, Moody's expects TBLA's leverage -- as measured by adjusted debt/EBITDA -- to decline from around 3.3x in 2018 to 2.8x-3.0x over the next 12-18 months. Such leverage levels are supportive of TBLA's Ba3 ratings.

"TBLA's Ba3 ratings also continue to reflect the favorable long-term, domestic demand fundamentals of its dual commodity business of palm oil and sugar," adds Hasnain, also Moody's lead analyst for TBLA.

For example, TBLA's earnings growth will be supported by higher biodiesel sales following the Indonesian government's regulation in September 2018 which stipulates expanding mandatory 20% biodiesel blending (B20) to all diesel fuel consumed in the country. As a result, the state-owned oil and gas company, Pertamina (Persero) (P.T.) (Baa2 stable), doubled its annual biodiesel order from TBLA to around 217,000 tons in 2019.

Moody's also expects TBLA to reduce its debt balance via free cash flow generation, due to lower capital spending. TBLA has completed major capacity expansion projects in recent years. Thus, Moody's expects capital spending will decline to IDR650 billion in 2019 from around IDR1.1 trillion in 2018 and IDR1.7 trillion in 2017.

At the same time, TBLA's Ba3 ratings will continue to incorporate its small scale of operations, exposure to the cyclical nature of palm oil and sugar prices, and uncertainties around timings for its receipt of import quotas for raw sugar from Indonesia's trade ministry. This situation can lead to swings in cash from operations and volatility in its credit metrics.

Moody's estimates TBLA's cash balance and projected cash from operations will be insufficient to meet its projected cash uses over the next 12 months. However, this liquidity risk is partially mitigated by TBLA's diversified and long-term banking relationships of 30-40 years, including with some of Indonesia's largest domestic banks, and its track record of rolling over short-term debt maturities when they come due.

The rating outlook is stable, reflecting Moody's expectation that TBLA's credit metrics will improve, and its management will maintain a prudent and conservative approach toward further investments.

Upward ratings pressure will build if TBLA successfully executes its business plans and grows its scale, generates positive free cash flow, and demonstrates a sustained improvement in its financial metrics, such that adjusted debt/EBITDA is below 2.5x, and EBITA/interest expense is above 4.0x on a sustained basis.

Any positive rating action will also be premised on TBLA improving its liquidity profile, such that internal cash sources are sufficient to meet its cash uses, including for its short-term debt maturities.

TBLA's rating could face downward pressure if: (1) the company is unable to execute on its business plans or deviates from its stated prudent financial policies; or (2) palm oil and sugar prices deteriorate, leading to a protracted weakness in TBLA's financial metrics. Specific indicators for a ratings downgrade include adjusted debt/EBITDA above 4.0x and adjusted EBITA/interest expense of less than 2.75x on a sustained basis.

A deterioration in its liquidity profile, including an increased reliance on short-term funding, would also lead to negative ratings pressure.

The principal methodology used in these ratings was Global Protein and Agriculture Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Jakarta and incorporated in 1973, Tunas Baru Lampung Tbk (P.T.) (TBLA) is a producer of palm oil and sugar products. As of 31 December 2018, TBLA was 28%-owned by Sungai Budi (P.T.) and 27%-owned by Budi Delta Swakarya (P.T.). These two major shareholders are equally owned by Mr. Widarto, who serves as the executive chairman of TBLA, and Mr. Santoso Winata, who is the president commissioner of TBLA.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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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.

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Maisam Hasnain, CFA
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

Laura Acres
MD - Corporate Finance
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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